
Southern Branch 
of the 

University of California 

Los Angeles 

Form L-1 

15'D 



/ 



This book is DUE on the last date stamped below. 



MAR 10 1931 
J'\N 1 9 1932 
FEB 1 



. JJ932 



\j- 



bhP ± J iuJll 
tFTD BOOK BOX 
SEP 1 5 1960 



3m-8,'20 



INDUSTRIAL MANAGEMENT LIBRARY 



SHOP EXPENSE 



ANALYSIS AND CONTROL 



BY 

NICHOLAS THIEL FICKER 

OOSaULTINQ INDUSTRIAL ENGINEER AND LECTURER ON FACTORY ENGINEEBINO 

AND COST REDUCTION AT NEW YORK UNIVERBITT, SCHOOL OP 

COMMERCE, ACCOUNTS AND FINANCE 




NEW YORK 
THE ENGINEERING MAGAZINE COMPANY 

1920 

400G4 



Copyright, 1917, by 

THE ENGINEERING MAGAZINE COMPANY 

NEW YORK 



TS 



TO MY MOTHER 



^ 



^ 



INTRODUCTION 

The first eight chapters of this book appeared origi- 
^ nally in The Engineering Magazine as a series of 
<fj articles extending over a period of eight months. They 
^ were immediately accorded recognition by manufac- 
♦ turers and accountants alike as a standard reference 
^ work on this, the most difficult phase of cost finding. 
These eight chapters have been supplemented by 
r^ others to show the definite application of the subject. 
I The author's method of treatment demonstrated 

> thoroughly the fact that some of the various phases 
\) of Shop Expense, which previously have been given 
•>C only brief consideration, vitally affect the whole prob- 
"^ lem. Of interest to the management is the method 
^ shown by Mr. Ficker for exercising executive control 
over each phase of production by a systematic segre- 
gation of all of the charges relating to it. 

The findings of the author are that the orthodox 
methods of cost finding are wrong, since in their appli- 
cation the management is able to shift responsibility 
from its shoulders to those of the shop proper when- 
ever the occasion may arise. Both Mr. Ficker and 
Mr. H. L. Gantt, who needs no introduction, arrived 
independently at this conclusion, and simultaneously 
published their belief that the fallacious, older methods 
of cost determination must go. This basic principle of 
executive responsibility is expressed in Chapter VIII, 
and should rank as a notable contribution to the sci- 
ence of Industrial Management. 

Chaeles Eaele Funk. 



^ 



PREFACE 

Manufacturers are often too inclined to treat the 
problem of shop expense distribution in an empirical 
rather than in a practical manner. They establish 
arbitrarily certain rates of expense loading and then 
cannot understand why their costs of manufacture 
appear ridiculously high or low as the case may be. 
Like any other experiment made without forethought, 
it usually ends in failing to accomplish what was in- 
tended. 

The extensive development and utilization of auto- 
matic machinery for manufacturing purposes have 
been conducive to a diminishing labor cost and an in- 
creasing overhead expense. The fact that this is indi- 
cative of a healthy condition is frequently lost sight of, 
however, by manufacturers who look upon an increase 
in their shop expense as something incompatible with 
efficient management. It naturally follows, therefore, 
that as the disparity between labor and expense in- 
creases, the greater must be the vigilance exercised to 
prevent the expense factor from getting beyond definite 
limits. 

According to the latest available figures furnished 
by the Federal Trade Commission, only ten per cent 
of the 250,000 or more manufacturing plants in the 
United States have adequate cost finding methods in 
operation ; forty per cent estimate their costs and fifty 
per cent have no basis whatever of knowing what these 
costs are. With the large majority of these manufao- 

vii 



VIU PREFACE 

tnring establishments still doing business on a hap- 
hazard basis, therefore, the science of Industrial Man- 
agement cannot be considered as in anything but a 
transitory state of development. 

In presenting this book for study and analysis the 
author does not claim to have exhausted the subject, 
but, on the contrary, earnestly believes that much 
greater development work must be done before any- 
thing approaching universal standardization of cost 
finding methods can be possible of attainment. It has 
been simply with the object of paving a small part of 
the way towards such eventual standardization that 
this book has been written. 

The author wishes to thank those of his friends who, 
by their suggestions or criticism, have helped in the 
preparation of this work. To Mr. Willard F. Hine 
the author is especially indebted for his valuable criti- 
cisms and assistance in establishing the various view- 
points necessary to a successful treatment of this sub- 
ject. 

Nicholas Thiel Ficker. 

March, 1917, 

X 



CONTENTS 

CHAFTZB ?ACQI 

I. Establishing the Unit of Time as a Basis op Dis- 
tribution 1 

II. The Two Main Divisions: Machine Expense and 

Material Expense .14 

III. Classification and Interpretation of General 

Ledger Accounts Peetaining to Production . 29 

IV. Distributing Manufacturing Expense to Produc- 

tion Centers and Segregating Power Expense 45 

V. The Standardization op Rent Expense Distribu- 
tion 64 

VI. Depreciation, Insurance, Taxes, and Inteebst — 
Tool, Material, and Special Department Ex- 
pense 77 

VII. The Machine Unit System 94 

VIII. Current Variation Ratios p(» Adjustinq Ctjbbent 

Costs 117 

IX. Organization 132 

X Waste in Manufacturing 154 

)[L. Graphic Determination op Costs .... 171 

XII. Standard Reports ...•••. 198 



SHOP EXPENSE ANALYSIS 
AND CONTROL 

Chapter I 

ESTABLISHING THE UNIT OF TIME AS A 
BASIS OF DISTRIBUTION 

A SHOP cost is made up of three component parts : 
Labor, Material, and Manufacturing Expense. 
Labor and Material are quantities which are easily de- 
termined, but the correct distribution and apportion- 
ment of Manufacturing Expense so that each job pass- 
ing through the factory may bear its true share is a 
matter requiring the most careful analysis and study. 
When we stop to consider that in a large percentage 
of the two hundred and fifty thousand or more facto- 
ries in the United States, this manufacturing expense 
amounts to more than the combined total of the pro- 
ductive labor and material used, an idea of its im- 
portance will be readily comprehended. 

Probably the most common practice of distributing 
manufacturing expense is that of taking the total of 
this expense for the previous year and determining 

1 



Z SHOP EXPENSE ANALYSIS 

what percentage this total bears to the productive labor 
for that period, and then applying this percentage to 
each job on the basis of the productive labor which 
has been charged directly to these jobs. Except in 
rare instances where the monthly output is practi- 
cally uniform and where the article made consists of 
only one item of merchandise, this method of apply- 
ing manufacturing expense is of no value whatever. 
Even in such a case as has just been cited it would 
not be correct to distribute the expense on the basis 
of productive labor where this productive labor is 
made up of a combination of day-work and piece-work 
labor. 

Let us take, for example, a factory employing one 
hundred people in five manufacturing departments, 
and assume that the class of merchandise manufac- 
tured is brass fittings, of which there are two dozen 
different articles. In looking over his books for the 
preceding year, the manufacturer finds that his produc- 
tive labor amounted to $100,000 and his manufacturing 
expense to $50,000. He reasons, therefore, that if 
he adds fifty cents to every dollar of productive labor 
applied on jobs passing through his factory during 
the ensuing year, he will have a fairly accurate idea 
of what it costs him to manufacture each job. He 
therefore issues an order to his cost department to 
compile costs for the ensuing year on that basis, and 
then feels that he has solved the whole problem of 
cost finding on any of his two dozen different articles 
of manufacture and has established a correct basis 
for estimating and billing purposes. Let us now see 
how near he is to his real costs of production. The 
factory is divided into five different departments as 
follows : 



THE UNIT OF TIME 



Department 


Number of 
Employees 


Productive 
Tiftbor 


Lathe 


15 
15 
20 
5 
45 


$ 9,000.00 

18,000.00 

18,000.00 

5,000.00 

50,000.00 


Milling 


Drilling 


Punch Press 


Assembly 


Total 


100 


$100,000.00 



A detailed analysis of mannfacturing expense, con- 
sisting of charges for administration, power, rent, 
light, tool expense, depreciation, insurance, taxes, sun- 
dry, and material expense, showed that the manufac- 
turing expense should have been divided as follows: 



Department 


Manufacturing 
Expense 


Percentage of 
Productive Labor 


Lathe 


$ 6,000.00 

15,000.00 

9,000.00 

10,000.00 

10,000.00 


67 
83 
50 
200 
20 


Milling 


Drilling 


Punch Press 


Assembly 


Total 


$50,000.00 


50 



This analysis shows a wide variation between the 
relation of the manufacturing expense and the produc- 
tive labor of the various departments. The "drill- 
ing department" alone shows a percentage on which 
it would be safe to apply the 50 per cent charge for 
manufacturing expense; the variations in the other 
four departments showing a discrepancy of from 20 
to 150 per cent. 



4 SHOP EXPENSE ANALYSIS 

A study of the comparative table which follows will 
show this variation very clearly. It will be seen, for 



Department 


Productive 
Labor 


Manu- 
facturing 
Expense 


Percent- 
age of 
Mfg. Ex- 
pense to 
Productive 
Labor 


Depart- 
mental 

Mfg. Ex- 
pense 
Based 
on 50 

Per Cent 
Rate 




Error in 
Unit Costs 
by Using 
One Gen- 
eral Rate 
forAU 
Depart- 
ments 


Lathe 

Milling 

Drilling 

Punch Press . 
Assembly . . . 

Total 


$ 9,000 

18,000 

18,000 

5,000 

50,000 


$ 6,000 

15,000 

9,000 

10,000 

10,000 


67 
83 
50 
200 
20 


$ 4,500 

9,000 

9,000 

2,500 

25,000 


-$1,500 

- 6,000 

- '7,500 
+15,000 


$100,000 


$50,000 


50 


$50,000 





example, that tlie actnal manufacturing expense of the 
"Punch Press Department" is 200 per cent of the pro- 
ductive labor; therefore, if the manufacturer applies 
the general rate of 50 per cent, which he decided at the 
beginning of the year to add to productive labor on 
jobs in order to cover the indirect expense incurred, 
his costs of production in the Punch Press Department 
would be $7,500 too low. In like manner the costs of 
the "Assembly Department" would be $15,000 too 
high, due to the fact that the manufacturing expense 
in this department is actually only 20 per cent of the 
productive labor. 

Percentages cannot be averaged when they are based 
on different units. The error of assuming that they 
will average is committed constantly by even some of 
the largest and most efficient manufactories. The 
average manufacturer, after a presentation of errors 



THE UNIT OF TIME 6 

similar to those which have just been cited, will say, 
"Very true — hut what difference will it make even if 
my departmental expense charges are wrong, so long 
as they average out in the final completed cost?" This 
would be difficult to answer, providing his assumption 
were correct. His whole basis of reasoning, however, 
is wrong, for the simple reason that he has failed to 
grasp one of the fundamental laws of mathematics 
and has labored under the delusion that a minus per- 
centage in one department would be offset and equal- 
ized by a plus percentage in another department. The 
road to bankruptcy is strewn with the wrecks of just 
such men who failed to appreciate until too late this 
very simple but yet most important principle. A con- 
crete illustration of just how errors of this kind are 
made each day would probably be of interest at this 
point. 

Let us assume that a certain order has just been 
completed after passing through all of the departments 
of the shop, and is now ready to be figured. 

The time tickets show that forty-two hours were 
spent on this job. For simplicity, let us assume a uni- 
form wage rate of twenty cents an hour. An analysis 
of these time tickets by departments would then show 
the work to have been divided as follows: 



Department 


Time 


Rate 


Labor Cost 


Lathe 

Milling 

Drilling 

Punch Press . . . 
Assembly 

Total 


2hrs. 

4 « 

6 « 

10 « 

20 « 


$0.20 

u 
u 
u 
u 


$0.40 
0.80 
1.20 
2.00 
4.00 


42 hrs. 


$0.20 


$8.40 



6 SHOP EXPENSE ANALYSIS 

Adding to the above labor the standard manufac- 
turing expense rate of 50 per cent, which the manu- 
facturer decided was to be applied to all jobs irrespec- 
tive of the department in which the work was done, and 
considering the material cost as $1, this job would 
then show a total cost of $13.60, made up as follows : 

Labor $ 8.40 

Manufacturing EJxpense 4.20 

Material 1 .00 

Total $13.60 

We have found by analysis, however, that each of the 
departments through which this job passed in the 
process of manufacture had a different rate of manu- 
facturing expense. Taking the actual percentage of 
manufacturing expense for each department and com- 
piling the shop cost of each job by figuring this ex- 
pense separately, we find a considerable variation ex- 
isting between the cost as compiled on the 50 per cent 
basis for all departments and that compiled by con- 
sidering the work of each department independently. 
The cost figures would appear as follows: 



Department 


Labor 


Mfg. Expense 


Lathe 


$0.40 
0.80 
1.20 
2.00 
4.00 


67% = $0.27 
83% = 0.68 
50% = 0.60 
200% = 4.00 
20% = 0.80 


Milling 


Drilling 

Punch Press 

Assembly 

Total 


$8.40 


$6.35 



The manufacturing expense, therefore, which should 
have been applied against the labor on this job amounts 



THE UNIT OP TIME 7 

to $6.35, instead of $4.20 when computed on the 50 per 
cent basis, making an error of $2.15. This shows that 
the manufacturing expense which had really been ap- 
plied was approximately only two-thirds of the actual 
figure. Using the corrected figures, the cost would 
then show a total cost of $15.75, which is $2.15 in excess 
of the cost as figured on the 50 per cent basis, this re- 
vised cost being made up as follows : 

Labor $ 8.40 

Manufacturing Expense 6 . 35 

Material 1 .00 

Total $15.75 

Assuming that the manufactured product had a 
highly competitive selling field and that the percentage 
of profit which the manufacturer could add to his origi- 
nal cost of $13.60 was limited to 10 per cent, then the 
actual billing price of $14.96, at which the product was 
marketed, would, instead of netting him a profit of 
$1.36, net him an actual loss of $0.79. Or, looking at 
it from another angle, let us assume that this article 
had a market price of $15.50 and that, irrespective 
of the cost of manufacture, this price was the limit 
his customers would pay ; then the manufacturer would 
still imagine that he was making a profit of $1.90 or 
close to 14 per cent on his investment of $13.60, when 
in reality he was losing 25 cents on each of these arti- 
cles he sold. 

The question which the student of this subject will 
most naturally ask at this point is, ''What if he does 
lose money on this article, as long as he is making 
enough profit on some of his other lines to more than 
make up for this loss?" He may also ask, "What is 
the manufacturer to do, if he is forced to make an 



8 SHOP EXPENSE ANALYSIS 

article or line on which he is losing money, in order 
to keep all of his other lines intact?'* 

A farmer who raises chickens and does not occa- 
sionally take count of his stock will not discover until 
probably too late that some thieving fox has been prey- 
ing on those chickens ; but once let him know that such 
a condition exists and he will lie in wait night after 
night with a shotgun until the cause of trouble has 
been removed. This is analogous to the manufacturer 
in the above case : As long as he is not aware of the 
losses which are occurring, he will be satisfied to a 
certain extent and will not investigate; but once let 
him know that it is actually costing him more to make 
his goods than he can sell them for, and the fur will 
usually start to fly very quickly. A competitive ar- 
ticle which is being sold at less than his manufacturing 
cost usually means that some other manufacturer is 
turning out this article at a much lower cost than he 
is. This means investigating methods, locating leaks, 
and exercising a close watch and supervision over this 
line until the cause of trouble has been remedied. Very 
often it may even be found advantageous to discon- 
tinue a certain line because of excessive costs, but the 
factor of paramount importance is in finding where the 
trouble exists. 

There is also another phase of this matter which 
is worthy of consideration at this point. The very fact 
that a manufacturer is losing money on some lines 
and is still able to show a substantial profit at the 
close of each year's business means that he is making 
an abnormal profit on one or more of his other lines. 
By substantially reducing his selling prices on one or 
more of these lines showing such an abnormal profit, 
it may be possible for him to monopolize all the busi- 



THE UNIT OF TIME V 

ness in that line, his increase in sales more than making 
up for the small profit per unit sold. 

Shop costs when compiled on the hit and miss prin- 
ciple of using one general rate for manufacturing ex- 
pense, applicable to all departments and classes of 
work, are therefore of very little value except in very 
rare cases, such as that cited at the beginning of this 
chapter where the output is of the mass production 
style on a single type of merchandise. 

Manufacturing expense might justly be termed a 
function of time. It increases in a ratio which is prac- 
tically directly proportional to time. Administration, 
rent, depreciation, taxes, power, and other charges 
which make up the manufacturing expense, with the 
possible exception of that part known as material ex- 
pense, are all proportionate thereto. In using the 
productive labor as a basis of expense distribution, it 
must be thoroughly understood that only when such 
labor is used as a function of time is it permissible 
to use it as a basis for distributing manufacturing 
expense. 

Manufacturers and cost accountants very often make 
the mistake of using the productive labor as a basis 
when a large amount of this labor is piece-work. Even 
where the expense has been segregated by departments, 
the introduction of piece-work labor will change the 
entire aspect of the case. Piece-work is not a func- 
tion of time, it is a function of quantity ; and as manu- 
facturing expense, when not split up into two divisions 
(machine expense and material expense) and applied 
as two separate items to shop costs, cannot be dis- 
tributed correctly on any basis but that of time or 
functions of time, piece-work labor cannot be used as 
a basis for distribution. 



10 SHOP EXPENSE ANALYSIS 

It is not to be understood from the foregoing that 
even where the material expense is added to shop costs 
as a separate item is it permissible to use piece-work 
labor for distributing manufacturing expense. The 
method of applying this material expense will be taken 
up in a later paragraph and explained in detail. 

To illustrate more fully the error of using piece- 
work labor as a basis of expense distribution, let us 
take, for example, a department in which a certain 
manufacturing expense rate has been figured on the 
basis of straight day-work labor. 

At a punch-press machine in this department a 
man is getting paid at the rate of 25 cents an hour. 
By analysis of the cost of certain punched parts it 
was found that the operator punched out these parts 
at a rate of 2,500 an hour, and a piece-work rate of one 
cent a hundred was set for all work on this piece of 
merchandise, this being equivalent to his hourly rate- 
of 25 cents. Let us further assume that the depart- 
mental rate of, say, 60 per cent of the productive labor 
fairly accurately represents the expense of operating 
this punch press. This would mean that a charge of 
15 cents an hour (60 per cent of 25 cents) would cover 
the cost of the manufacturing expense which this ma- 
chine must bear of the department's total charge. 

Piece-work is introduced at this point. The press- 
man, spurred on by the incentive of higher wages, 
speeds up his production to such an extent that in- 
stead of turning out 2,500 pieces an hour he actually 
increases this to 4,000 pieces. At the rate of one cent 
a hundred, his pay, therefore, amounts to 40 cents an 
hour instead of the 25 cents which he earned on an 
hourly basis. In due course of time the cost clerk 
who figures this job applies his 60 per cent to the 



THE UNIT OF TIME 11 

40-cent labor charge, making the manufacturing ex- 
pense chargeable against this job 24 cents. But if this 
pressman had turned out 4,000 pieces an hour while on 
a straight day-work rate of 25 cents an hour, the clerk 
would have added only 15 cents for manufacturing 
expense instead of 24 cents under the piece-work ar- 
rangement. This makes a difference of 9 cents in the 
manufacturing expense charge or, in percentage, a 
variation of 60 per cent over the original method of 
determining this expense. 

The only way to determine which of these two meth- 
ods is correct is to find whether or not these expenses 
actually did increase 60 per cent on an increased pro- 
duction due to the piece-work method. Administra- 
tion, rent, light, depreciation, insurance, taxes, and 
tool charges remain the same regardless of the volume 
of output; all that remains of the items which enter 
into the manufacturing expense are power and ma- 
terial expense; and the very small increase in either 
or both of these items would be so small as to hardly 
make them worthy of consideration. Piece-work can- 
not, therefore, be used as a basis for manufacturing 
expense distribution. The labor must be reduced to 
functions of time or else be figured directly on the 
basis of time. 

In order to determine correctly the manufacturing 
expense on the job above referred to, the cost clerk 
must first know the time it has actually taken the 
pressman to stamp out the 4,000 pieces and, finding 
this to be one hour, he then applies his standard rate 
of manufacturing expense for that department (which 
is 60 per cent of the productive labor) to the 25-cent 
labor charge which would have been incurred on this 
job had the workman been paid on a straight hourly 



12 SHOP EXPENSE ANALYSIS 

basis, and by so doing finds the charge for mannfac- 
turing expense against this job to be 15 cents. 

Manufacturers commonly commit the error of dis- 
continuing time-keeping on jobs after piece-work rates 
have once been established. The importance of timing 
all jobs will be appreciated by simply keeping in mind 
the fact that the unit of time must be used as a basis 
for distributing manufacturing expense. In some of 
the larger manufacturing establishments where the 
piece-work labor amounts to 80 per cent or more of 
the total productive labor, the time spent on each 
operation is known to a small fraction of an hour. By 
this means only can a reasonably accurate basis be 
established for the distribution of manufacturing ex- 
pense. 

The purpose of this opening chapter has been to 
impress on the mind of the reader the necessity for 
segregating all of this expense by manufacturing de- 
partments ; to establish the unit of time as a basis for 
such distribution; and to point out some of the mis- 
takes that are made where a thorough knowledge of 
the subject is lacking. It will be seen, as a deeper 
insight into manufacturing expense distribution is 
gained, that a much finer segregation is possible than 
that by departments which has been used as a basis 
of discussion in this chapter. The method of apply- 
ing this expense directly to machines by what is known 
as the "machine unit system" will be treated in Chap- 
ter VII, and the control over the machine unit system 
by the ''current variation method" will be explained 
in detail in Chapter VIII. The most important point 
to be comprehended at this time, however, is that none 
of these finer distinctions are possible until after the 
primary stages are put into operation. 



THE UNIT OF TIME 13 

Many accountants make the mistake of thinking 
they can hurdle these primary stages and start right 
in on a segregation of expense by machines or process 
points without first proving their distribution by de- 
partments as herein outlined. Nothing is to be gained 
by such methods of procedure, as they invariably re- 
sult in disaster to the entire scheme. The first require- 
ment is to establish to a satisfactory degree of cer- 
tainty a basis that is correct, then each successive step 
will become simply a matter of careful analysis and 
procedure. 



Chapter II 

THE TWO MAIN DIVISIONS: MACHINE EX- 
PENSE AND MATEEIAL EXPENSE 

BEFORE going into a detailed analysis of the vari- 
ous elements comprising manufacturing expense, 
it is of paramount importance that a thorough under- 
standing be had of just what is included by the term. 

A manufacturing establishment may be arbitrarily 
divided into three main divisions of organization: 
First, the manufacturing or shop organization; sec- 
ond, the sales organization; and, third, the general 
organization. 

The sales organization, which is self-explanatory, 
and the general organization, which consists of the 
general executive oflScers of the company and their 
staffs, may be eliminated from this discussion. We are 
simply concerned with what is known as the manu- 
facturing or shop organization and the expense inci- 
dental thereto. Whenever the term ''manufacturing 
expense*' is used in this treatise it should be under- 
stood to refer only to the shop proper and not to 
any other organization unit of the company. 

Manufacturing expense may be defined as consisting 
of all charges incurred in connection with manufac- 
turing which cannot be considered as productive labor 
or raw material. It is made up of two distinct kinds 
of expense — machine expense and material expense. 

14 



MACHINE EXPENSE AND MATERIAL EXPENSE 15 

These two divisions of manufacturing expense require 
distribution to jobs according to different methods. 
Machine expense, for example, is distributable on the 
basis of time, while material expense is more or less 
proportional to the bulk of the raw material used. 

In classifying original expense items, however, it 
is extremely difificult, if not impossible, to charge ex- 
penses directly against either machine expense or ma- 
terial expense with any degree of accuracy. This can 
be illustrated by considering the expense charge for 
light, which forms part of what we shall later denote as 
rent expense. The expense of lighting the material 
stockrooms, for instance, would be classified ''material 
expense;" while the expense of lighting the manufac- 
turing departments would be classified "machine ex- 
pense. ' ' From this example it can be seen that it would 
be practically impossible for the clerk who does the 
classifying to pro-rate correctly an expense charge 
for light so that the two main divisions of manufac- 
turing expense would receive their just allotment. 
Therefore, in order to simplify the work of classifica- 
tion, all expense items are first charged to one or more 
of the classes listed below. 

Administration Expense 
Power " 

Rent « 

Tool « 

Fixed Charges: — 

Depreciation ** 

Insurance " 

Taxes " 

Idle Labor « 

Unclassified " 

Direct charges to Ma- 
terial Expense ^ 

> Includes only expense pertainins to 
material 



Closed out into Machine Ex- 
pense or Material Expense 
or both 



16 SHOP EXPENSE ANALYSIS 

After making the preceding classification the ex- 
pense items are then closed out, as indicated, at peri- 
odic intei'vals into either machine expense or material 
expense according to certain fixed rules which will be 
discussed later. 

Whenever charges are made against any of the above 
classes, a further sub-classification by departments and 
kinds of expense should be made. For example, a 
charge for "Repairs to a Punch and Die" would be 
classified ''Tool Expense — Eepairs to Tools — Punch 
Press Department." Symbols denoting these classi- 
fications are used to save time. Thus, the foregoing 
example might be classified as follows: 

25—032—525 
in which 25 is the general ledger account number for 
manufacturing expense ; 032, the sub-classification de- 
noting "Repairs to Tools," and 525, the number of 
the department incurring the charge. In this manner 
a. large part of the manufacturing expense can be read- 
ily segregated by departments. 

There are, however, some expenses which cannot be 
charged directly to specific manufacturing depart- 
ments. These require distribution according to cer- 
tain fixed rules ; for example, administration expense, 
against which the salary of the general superintendent 
is chargeable, could not be assessed directly against 
any one department. It is, therefore, simply charged 
in blanket form to administration expense and then 
later it is pro-rated amongst the various departments 
on the basis of the number of employees in each. A 
shop superintendent does not superintend floor space or 
machines, but he does superintend the personnel of 
each department ; therefore his salary and the salaries 
of his general staff are chargeable to the various manu- 



MACHINE EXPENSE AND MATERIAL EXPENSE 17 

facturing departments on the basis of the normal num- 
ber of employees in each department. On the other 
hand, rent expense is distributed on the basis of floor 
space occupied by each department; power expense 
on the basis of kilowatt-hours consumed; and fixed 
charges on the basis of face values of equipment in 
each department. 

Non-productive labor, such as wages of sweepers, 
material porters, freight elevator operators, watch- 
men, etc., requires classification depending on the 
source of incurrence to one or more of the several 
main divisions of expense which have been listed, 
and is finally absorbed in the departmental expense 
charges through the distribution of these main divi- 
sions of expense. For example, the wages of sweepers 
are chargeable to rent expense, and eventually are 
absorbed by the manufacturing departments through 
the rent charge which is assessed against all depart- 
ments, store-rooms, etc., on the basis of the number 
of square feet occupied by each. This charge per 
square foot is determined by simply applying the total 
of all charges included in rent expense against the 
total manufacturing area and then reducing it to a 
charge per square foot. In like manner, wages of fire- 
men are chargeable to power expense, and are dis- 
tributed, together with other power expense items, on 
the basis of a rate per kilowatt-hour according to the 
power consumption of the various departments and 
divisions of the factory. 

It is not the intention at this point to go very deeply 
into an analysis of all of the sub-classifications to 
the several main expense divisions, which will be dis- 
cussed more fully in a following chapter, but to lay 
particular stress upon the importance of classifying 



18 SHOP EXPENSE ANALYSIS 

correctly all accounts which in any way affect the 
distribution of manufacturing expense. 

In the opinion of the writer the division of expense 
that deserves to rank as most important is that clas- 
sified as "idle labor expense." For some reason or 
other, however, those factors most deserving of con- 
sideration in a manufacturing establishment are the 
ones most apt to be neglected by the management. 
This statement is not made on hearsay, but is the con- 
clusion forced upon the writer by association with 
conditions as they actually exist in many plants 
throughout the country. All that the average factory 
manager seems to be interested in is in knowing that 
his employees are at their benches or machines when 
the whistle blows in the morning, that they stay there 
except during the lunch period until the whistle blows 
at night, and that some sort of distribution is made of 
the time spent by them on different jobs during this 
period. How much time has been wasted during the 
course of each day does not seem to be of particular 
interest to him. Ask the average manufacturer how 
much time his men waste in waiting for new jobs, how 
much time they waste waiting for tools, how much time 
they waste reporting to time clerks at the start and 
completion of each job. If he is honest he will tell you 
that he doesn't know. He may aiso tell you that all 
the time of his productive employees is distributed on 
jobs. Surely, there is nothing simpler than to charge 
every minute of the day to the five or ten jobs a man 
may have worked on during that time. However, the 
facts remain. 

Let us take, for example, a factory employing 100 
workmen in the manufacturing departments at an aver- 
age wage of 25 cents an hour. We will assume that 



MACHINE EXPENSE AND MATERIAL EXPENSE 19 

the factory day is nine hours long, and that the aver- 
age number of job changes is six a day. At the start 
and finish of each of these six jobs every employee 
reports to a timekeeper who, by the use of a time 
stamp, records the time of starting and finishing each 
job. There are two time clerks in the shop to handle 
the time of a hundred men. They are as centrally 
located as possible; but by timing the men, without 
their knowledge, it is found that it takes a man an 
average of two minutes going to and two minutes com- 
ing back from the timekeeper's desk at the start and 
completion of each job he works on during the day. 
(This figure is very conservative and can be substan- 
tiated in almost any factory engaged in work requir- 
ing successive job changes.) We find, therefore, a loss 
of four minutes for each job, or twenty-four minutes 
a day, for each employee. This means 2,400 minutes, 
or forty hours a day for the entire force ; at 25 cents 
an hour it is equivalent to $10 per day; for a year 
of 300 working days it means a direct loss of $3,000. 
There are methods whereby this time can be recorded 
right from the workmen's benches or machines that 
work out very satisfactorily and do not require the 
men to leave their places at any time. This will an- 
swer the question of how job records are to be kept 
without necessitating the above loss of time. 

Then, in addition to this $3,000 waste, there is the 
time consumed in waiting for the next job which, 
through faulty planning, has not arrived on schedule. 
These 'Svaits" average anywhere from five minutes 
to half an hour, depending on how much interest the 
management shows in this part of the routine. In 
any event a loss of half an hour a day for each man 
would be extremely low and could hardly be criticized 



20 SHOP EXPENSE ANALYSIS 

as being harsh on the management in view of present- 
day conditions. This means another loss that amounts 
to 50 hours, or $12.50 a day, or $3,750 a year. A total 
loss of $6,750, therefore, exists in comparison with a 
payroll of $67,500 for the year. In other words, 10 
per cent of the available productive labor is wasted. 
This means that, without taking any other than these 
two causes of loss into consideration, there is a charge 
right here of $6,750 to manufacturing expense, which 
must be distributed and absorbed by the output of 
the factory. It is worthy of note, nevertheless, that 
efficiency engineers, cost accountants, and managers of 
factories usually neglect to take this factor of idle 
time into consideration from a strictly expense point 
of view. Much has been written dealing with meth- 
ods of applying the undistributed portion of manu- 
facturing expense to costs of production where a bal- 
ance has accumulated due to a decrease in shop ac- 
tivity, but for some unaccountable reason the expense 
incurred in the form of labor not engaged in producing 
has been almost entirely disregarded. 

The importance of knowing, therefore, what the ma- 
chine activity is for the shop as a whole and for each 
department thereof becomes even more apparent when 
the fact is realized that the other manufacturing ex- 
pense items, such as administration, power, rent, de- 
preciation, insurance, taxes, etc., have also been undis- 
tributed on production orders during the period meas- 
ured by the *4dle labor" just referred to. 

A machine standing idle is still occupying floor space 
(rent expense) ; is still incurring tax and insurance 
charges; is still piling up power charges through the 
running of idlers, countershafting, etc.; is still de- 
preciating in value more than if it were in operation; 



MACHINE EXPENSE AND MATBBIAL EXPENSE 21 

and the administration expense is still being charged 
against the operator of that machine whether he is 
producing or not. Therefore, for every minute that is 
charged as *^idle productive labor" and which repre- 
sents a loss in cold cash to the manufacturer a certain 
additional amount for the manufacturing expense in- 
curred during that period is also chargeable. The 
amount in dollars and cents which the sum of these 
two sources of loss represents is the measure of the 
loss which the manufacturer is really forced to stand. 

A careful consideration of the facts as presented 
cannot help but force the conclusion that "idle 
labor" is a very important factor in connection 
with the distribution of manufacturing expense. 
However, once its importance is realized, it is a com- 
paratively simple matter to apply a remedy. Leaks 
of any nature in a manufacturing establishment derive 
their importance not so much from their occurrence 
as from a lack of knowledge as to their existence. To 
know is to remedy, but the simplicity of the remedy 
has no bearing on the case providing the need of its 
application remains undiscovered. 

Much has been written dealing with the routing and 
scheduling of shop orders, and with stock-keeping 
methods in general. The purpose here is not to discuss 
this phase of manufacturing in any way except to 
point out that a proper method for handling, routing, 
and scheduhng production orders is essential if a con- 
trol over this important factor of expense called "idle 
productive labor" is to be exercised. 

Another important division of manufacturing ex- 
pense is that classified as "material expense." Ma- 
terial expense may be defined as that expense incurred 
in purchasing, receiving, and handling shop, raw, and 



22 SHOP EXPENSE ANALYSIS 

worked materials. It includes such expenses as depre- 
ciation, insurance, and taxes on raw and worked ma- 
terials, salaries of raw and process material stock- 
keepers, counters, inspectors and porters, freight ele- 
vator operators (in part), etc. In shops where large 
cranes are used it also includes the salaries of crane- 
men. 

All manufacturing expense which is not chargeable 
as material expense is known as "machine expense." 
Where accurate costs are required, material expense 
should be applied to shop costs as a separate item; 
that is, it should not be included with the machine 
expense as one general loading, but should be con- 
sidered separately. In such cases it should be applied 
as an individual rate, called material expense, on the 
basis of the value of the raw material charged against 
an order, or on the basis of the bulk (represented by 
weight) of the material used. The construction of a 
shop cost made up in this manner is here shown : 

Productive Labor 

Machine Expense)~~--.~.^._^^^^ 

Raw Material J^^;z:> (Manufacturing Expense) 

Material Expense) - 



Shop Cost 

The practice of sub-dividing manufacturing expense 
into machine expense and material expense respec- 
tively has for its object a more perfect control over 
the channels through which this expense accumulates 
than is possible where this segregation is not made. 
When classifying expense charges it necessitates very 
little extra effort to classify them properly by sub- 
divisions of expense instead of grouping them all under 



MACHINE EXPENSE AND MATERIAL EXPENSE 23 

one general classification. By this method it is a 
comparatively simple matter to segregate the manu- 
facturing expense so that at the end of every month, 
quarter, or year, comparisons can be made to deter- 
mine whether the machine expense or the material ex- 
pense has increased in undue proportion to the shop 
output. 

When applying material expense as a separate item 
in making up costs of manufacture, care should be used 
in establishing a basis of distribution. The practice 
of applying material expense to jobs, by using the cost 
of the raw material used on each job as a basis, is a 
mistake frequently made by manufacturers and cost 
accountants. Their method of establishing this basis 
is to take the total cost of the raw material used during 
a normal year and find what relation this cost bears 
to the material expense for the same period. With 
this relation established in the form of a percentage 
based on the raw material cost, they proceed to apply it 
to all shop jobs in order to determine the proper pro- 
portion of material expense chargeable thereto. 

There is only one correct way of distributing ma- 
terial expense, and that is on the basis of bulk. Prac- 
tically all material expense is incurred in a ratio pro- 
portional to bulk. By using the term "bulk" it is to 
be understood that the term ''weight" can be used 
as a substitute, but simply because it is a more stand- 
ard way of measuring material and because the bulk 
of an article is rather difficult to determine accurately. 
That there is quite a distinction between using the 
cost of the material and the bulk (or weight) of the 
material as a basis for material expense distribution 
will be readily noted from the following comparisons : 

It is a comparatively simple matter to handle and 



24 SHOP EXPENSE ANALYSIS 

store $1,000 worth of platinum; it requires, however, 
a considerable amount of time and effort to handle $25 
worth of brass castings. More space is required in 
the store-room for wrought iron pipe than is required 
for copper wire of equal value. Diamonds or precious 
stones require practically no handling expense as com- 
pared to the cost of handling lumber. Freight ele- 
vators are necessary because of the bulk (or weight) 
of a bale of cotton, but an equal value in gold could be 
carried in a man's pocket without effort. The con- 
clusion to be drawn, therefore, is that material expense 
does not to any appreciable extent vary in proportion 
to the cost of the material, except as such increase or 
decrease in cost is due to a greater or less bulk of 
material used. There are instances where the con- 
sumption of materials of different kinds is so uniform 
year in and year out as to permit the use of the ma- 
terial cost figures as a basis for material expense dis- 
tribution. Such cases do not warrant the segregation 
of material expense as a separate and distinct item of 
manufacturing expense, but in the average factory 
such a segregation is conducive to more accurate cost 
figures. 

The possibility of error is so great where the cost 
of the raw material is used for material expense dis- 
tribution as to warrant an illustration of how such 
an error can occur. Let us take, for instance, a fac- 
tory whose manufacturing expense has been divided 
into machine expense and material expense : The ma- 
terial expense has been found by analysis to average 
15 per cent of the cost of the raw material used as 
figured on the basis of a normal year. By analysis 
of past figures it has also been found that the machine 
expense of a certain department is 50 per cent of the 



MAOHIlirB SXP£NS£ AND MATfiBIAIi EXPENSE 25 

labor. A job is assigned to this department, and on 
its completion the cost clerk's figures would appear as 
follows : 

Productive Labor $3. 00 

Machine Expense, at 50 per cent . . 1 . 50 

Raw Material 6.00 

Material Expense, at 15 per cent . . . 90 

Total Cost $11.40 



An inspection of the order shows that the high ma- 
terial cost was due to the fact that platinum was used 
in the manufacture of what happened to be an elec- 
trical instrument requiring platinum contact points, 
etc. If the material used had been zinc or copper the 
material cost would have been considerably less than 
90 cents ; yet by a study of the items which go to make 
up material expense we find that it costs a great deal 
less to handle platinum than it does to handle copper, 
weight by weight ; therefore, something must be wrong 
with this method of applying material expense to shop 
orders. 

A study of the weight of the raw material, as found 
in the books of the company for the period over which 
the normal material expense was figured, showed that 
if reduced to a cost per pound basis the material ex- 
pense would be five cents a pound; the charge of 90 
cents should, therefore, have represented material 
weighing 18 pounds. The platinum used amounted to 
only a fraction of an ounce; hence, the charge of 90 
cents for material expense is actually over 85 cents 
too high, making a corresponding error in the shop 
cost as compiled by the clerk. 

The foregoing example demonstrates very clearly 



26 



SHOP EXPENSE ANALYSIS 



that the cost of raw material cannot be used as a 
correct basis for distributing the material expense por- 
tion of manufacturing expense. It does not necessarily 
follow, however, that it is always advisable to figure 
this expense by a system requiring the weighing of 
the material on each order. Circumstances alter cases, 
and it naturally follows that in such instances where 
the extra expense incurred in figuring this expense 
amounts to more than is justifiable in proportion to 
the benefits which can be derived from such a segrega- 
tion, a more general scheme of distributing material 
expense can be used. 

A factory turning out a line of injectors, lubrica- 
tors, valves, and grease cups, with an output varying 
but little from year to year, would be justified in es- 
tablishing a basis of material expense distribution by 
classes of merchandise manufactured. Let us assume 
the normal material expense to be $3,000 a year, with 
the output as follows: 



Class of Merchandise 


Pounds 
Output 


Per Cent of 
Total Output 


Injectors 


6,000 
24,000 
18,000 
12,000 


10 
40 
30 
20 


Lubricators 


Valves 


Grease Cups 


Total 


60,000 


100 



The material expense on an output of 60,000 pounds 
would amount to five cents a pound. Distributing this 
expense among the four classes of merchandise on the 
basis of the output in pounds for each class, the 
charges would appear as follows: 



MACHINE EXPENSE AND MATEBIAL EXPENSE 



27 



Class of Merchandise 


Pounds 
Output 


Material Expense at 
$0.05 Per Pound 


Injectors 


6,000 
24,000 
18,000 
12,000 


$ 300 

1,200 

900 

600 


Lubricators 


Valves 


Grease Cups 


Total 


60,000 


$3,000 



Eeference to the cost ledgers at this point shows 
that the actual cost of the raw material used amounted 
to $9,000, divided among the four classes of merchan- 
dise as follows: 

Injectors $1,200 

Lubricators 3,900 

Valves 2,700 

Grease Cups 1,200 

Total $9,000 

In order to establish a basis for the application of 
material expense as a percentage of the cost of the raw 
material used on each class of merchandise, it is only 
necessary now to reduce this material expense charge 
against each class to a percentage of the raw material 
cost. Working this out, the figures appear as follows : 



Class of Merchandise 


Cost of Raw 
Material Used 


Material 
Expense 


Percentage 

Applied on 

Basis of Raw 

MaterialUsed 


Injectors 


$1,200 
3,900 
2,700 
1,200 


$ 300 

1,200 

900 

600 


25 
31 
33 
50 


Lubricators 

Valves 


Grease Cups 

Total 


$9,000 


$3,000 


33 



28 SHOP EXPENSE ANALYSIS 

A percentage has now been established for the ap- 
plication of material expense to each class of mer- 
chandise. By simply computing this expense directly 
from the cost of the raw material used on each order 
the proportionate charge for this expense can be 
reached with reasonable accuracy. It should be kept 
in mind, however, that this method of using the cost 
of the material as a basis of material expense distri- 
bution holds reasonably true only in cases similar to 
the one hei-e cited. Wherever it is possible to do so, 
the only real basis of distribution, which is by bulk, 
should be used. 



Chapter III 

CLASSIFICATION AND INTERPRETATION OF 
GENERAL LEDGER ACCOUNTS PER- 
TAINING TO PRODUCTION 

THE proper interpretation and classification of all 
charges pertaining to manufacturing forms the 
basis for the correct distribution of manufacturing 
expense by classes of merchandise. It is therefore of 
vital importance that a thorough understanding be had 
of the functions and purposes of all general ledger 
accounts to which manufacturing charges are made, 
so that these charges may be classified correctly and 
data recorded in such manner as to make them readily 
available when needed. 

The primary object of the general ledger of a manu- 
facturing business is to show through its various ac- 
counts at any given time the operations of the com- 
pany, and by a comparison of the asset and liability 
items the status or worth of the concern at such a time. 
The purposes of its various accounts are for recording 
the investment of the company in property of all 
kinds, the purchases, sales and transfers of merchan- 
dise, the volume and cost of the production of the 
manufactured product, and the expenses incurred in 
running the business in its administrative, purchasing, 
selling, and stock-keeping functions; all with the ob- 



30 SHOP EXPENSE ANALYSIS 

ject of determining the degree of profitableness of the 
business in its various branches. 

Therefore, by establishing a basis for the classifica- 
tion of accounts in detail in such manner as to make 
them readily available, records in comparative or other 
form may be compiled for controlling purchases, sales, 
expenses, and production costs, which can then be used 
in combination with each other so as to reflect the 
workings of the company in its different departments 
and its capacity as a whole. 

The organization of a manufacturing business may 
be arbitrarily divided into three distinct parts, as 
mentioned in the preceding chapter, namely, I, Manu- 
facturing ; II, Trading, and III, Financial and General. 
Only the main divisions of the general ledger accounts 
pertaining to, I, Manufacturing, will be considered 
here. These may be shown as follows : 

(A) Factory Plant 

(B) Merchandise (Manufactured) 

(C) Raw Material and Work in Process 

(D) Depreciation of Factory Plant. 

The individual ledger accounts under each of these 
four main divisions are: 

(A) Factory Plant: 

1 Grounds 

2 Buildings 

3 Permanent Fixtures 

4 Machinery 

5 Small Tools 

6 Patterns 

7 Shop Fixtures 

(B) Merchandise : 

8 Merchandise (Manufactured) 



CLASSIFICATION OF ACCOUNTS 31 

(C) Raw Material and Work in Process: 
9 Shop Productive Labor 

10 Shop Raw Materials 

11 Shop Expense 

12 Shop Deliveries 

13 Shop Piece Parts 

14 Shop Scrap 

(D) Depreciation : 

15 Depreciation of Factory Plant. 

The scope of the respective accounts included under 
each of these four main divisions is naturally subject 
to revision, as are the accounts themselves, in order 
to make them conform more readily to existing condi- 
tions where they are to be used. The reader should 
bear in mind the general objective rather than the 
details herein set forth. The outline of accounts which 
the writer has used for illustration is, with certain 
modifications, similar to that in use at the present time 
by one of the large electrical goods manufacturing 
companies, and has been selected because of its clean- 
cut distinctions and the successful manner in which 
it has worked out in practice. 

The four main divisions of the general ledger ac- 
counts pertaining to manufacturing are as follows : 

(A) Factory Plant. To these accounts are charge- 
able the original cost of and additions to grounds, 
buildings, those permanent fixtures used principally 
for manufacturing, machinery, small tools, patterns, 
and shop fixtures. The cost of installation, as well as 
transportation charges, should be included with the 
cost of the various items. New values of renewals or 
improvements are chargeable as assets, the old net 
values being transferred to expense. When buildings 
which are to be torn down are included in the pur- 
chase price originally paid for the grounds, a part of 



32 SHOP EXPENSE ANALYSIS 

the cost of demolishing said structures may be charged 
to "grounds account." 

The * 'factory plant accounts" should be analyzed 
at periodic intervals and the records arranged by spe- 
cial classes so that an inventory is always readily 
available. These records can then be conveniently 
used in determining depreciation, insurance, taxes, and 
rent charges. The balances to the several plant ac- 
counts should always be indicative of the face values 
of the respective accounts. Adjustments for deprecia- 
tion should never be made directly through these ac- 
counts, but through the ''depreciation account" pro- 
vided for that purpose. This account is credited and 
"manufacturing expense account" debited with the 
amount to be set aside as a reserve for depreciation. 
The difference between the debit balances of the plant 
accounts and the credit balance of the depreciation ac- 
count should represent the net values of these accounts. 
The accounts under (A) Factory Plant will be detailed 
on page 36. 

(B) Merchandise (manufactured). To this account 
should be charged the cost of all parts manufactured 
each month, whether completely assembled or not. An 
inspection of the account will give an idea of the vol- 
ume of work done by the manufacturing departments, 
as represented by the cost figures. 

(C) Eaw Material and Work in Process. This is 
subdivided into the following accounts: 

Account No. 9. Shop productive labor. 

To be charged each month with the cost of the 
labor directly applied to production orders. 

Account No. 10. Shop raw material. 

Should be charged each month with the cost of 



OtlSSIFICATION OP ACG0T7HTS 33 

raw materials purchased for manufacturing use. 

Account No. 11. Shop expense. 

Should be charged each month with the current 
manufacturing expense charges for that period. 
It includes non-productive labor expense, mate- 
rials, supplies, etc., as will be explained in detail 
in a later chapter. 

Account No. 12. Shop deliveries. 

Should be credited monthlj with the sum of the 
shop productive labor, raw material, and shop 
expense applied on production orders for that 
period, and the merchandise (manufactured) ac- 
count debited to that extent. 

Account No. 13. Shop piece parts. 

Should be debited each month with the cost of 
completed piece parts manufactured which have 
not as yet been assembled, the merchandise (man- 
ufactured) account being credited to this extent. 
By this method of accounting, the value of fin- 
ished merchandise can be arrived at quickly from 
an inspection of the merchandise (manufactured) 
account. 

Accownt No. 14. Shop scrap. 

This account is designed to assist in determin- 
ing the expense incurred throughout the year in 
handling and disposing of shop scrap material 
sent out for disposition and should be credited 
with the amount received from the sale of same. 
All expense incurred in the handling and dispos- 
ing of shop scrap is chargeable to this account 
monthly. This includes all labor expended in con- 
verting this material into some shape or form 
which will tend towards increasing its value. It 
also includes the labor expended in sorting, 



34 SHOP EXPENSE ANALYSIS 

weighing, pressing, and boxing this material for 
shipment; the cost of packing supplies (rope, 
boxes, barrels, etc.) ; the burning of non-redeem- 
able waste; and the current operating expenses 
of the scrap room, such as power, rent, light, in- 
surance, taxes, administration, and depreciation 
of equipment. The balance to this account at the 
close of the year is indicative of a profit or loss 
on shop scrap and is closed out into the ''shop 
raw material account" through the following en- 
try: 

Dr. Shop Raw Material Account $100 

Cr. Shop Scrap Account 100 

Charging Shop Raw Material Account with loss sus- 
tained in disposing of Shop Scrap Material throughout 
the year. 

In case of a profit, reverse the above entry. 

(D) Depreciation of Factoey Plant. As explained^ 
in a previous paragraph this account is designed to 
show at any time the amount of depreciation which 
has been set aside as a reserve for the replacement 
of the plant. This account is credited and the shop 
expense account debited each month with the accrued 
depreciation for that period. By crediting deprecia- 
tion in this manner, the face values of all equipment 
as indicated by the factory plant accounts are shown 
without deductions for depreciation, the difference be- 
tween the plant accounts and the depreciation account 
representing the net value of the plant. The advan- 
tage of showing face values without deductions is 
found when compiling depreciation, insurance, and tax 
charges, and also in the event of liquidation of the 
plant assets. Methods of computing depreciation will 
be discussed more fully in a later chapter. 



CLASSIFICATION OF ACCOUNTS 35 

The foregoing outline of the scope and functions of 
those accounts listed as ''pertaining to manufactur- 
ing" will serve to give an idea of the relation existing 
between them. A comprehensive understanding as to 
the purpose of each account is essential in order that 
charges may be properly classified and that final totals 
for manufacturing expense may be correct. 

When drawing up a standard reference list of sub- 
classifications, clean-cut lines of distinction between 
each and every other class should be made. This will 
not only be conducive to more accurate records, but 
will also be of great assistance in the actual work of 
classifying. Where a clean-cut line of distinction has 
been made, the clerk doing the classifying does not 
have to draw on his imagination as to the proper dis- 
position of charges for factory plant, merchandise, or 
expense. He simply refers to his standard list of clas- 
sifications which determines the disposition of the 
charges for him. 

The depreciation of an article and the disposition 
of any expense which may be incurred in connection 
therewith are the factors which largely determine its 
classification. Since these factors vary, it is almost 
impossible to give any concise definition without a 
long line of exceptions. However, it will suffice to state 
at this point that too much detail in the form of sub- 
classification of accounts is decidedly better than too 
little, as is the case where all kinds of charges are 
classified under one heading. 

An illustration of the correct method of drawing up 
a standard reference list of classifications will be found 
in the following analysis of the "factory plant ac- 
counts." The sub-classification of these accounts ac- 
cording to fixed lines of distinction will be noted. 



36 shop expense analysis 

Account No. 2. Buildings 

001 Architects' fees, Engineering, and Inspection 

002 Excavation 

003 Foundations ^ 

004 General Mason Work: 

a Walls (brick, concrete, stone or tile) 
b Exterior Stone (special and terra cotta) includes 
lintels, sills, water tables, coping, cut-stone, etc. 
c Roof (concrete, tile, etc.) 
d Floors (concrete, tile, etc.) 
e Interior Stone and Tile Work 
/ Plastering 

005 Metal Work: 

a Structural Iron and Steel (includes columns, 
girders, trusses, floor beams, anchors, etc.) 

b Ornamental Metal Work 

c Sheet Metal and Miscellaneous Metal Work (in- 
cludes metal roofs, steel siding, metal doors and 
windows, flashing, gutters, iron railings, metal 
ceilings, etc.) 

006 Wood Work: 

a Structural Wood Work (includes girders, beams, 
columns, joists, purlins, studs, lath, bridging, etc.) 

b Roofing, Flooring and Siding 

c Millwork (doors, windows, railing, baseboards, 
mouldings, etc.) 

007 Plumbing, Sewer, Water and Gas connections from 
the main headers in building to the street 

008 Special Chimneys and Stacks 

009 Miscellaneous (include under this heading all items 
not included under the above classifications, such as 
special roof coverings, etc., unless they are of a nature 
justifying a special classification). 

Note: — The above classifications are merely a suggestion. 
They can be amplified or cut down to meet particular require- 
ments in any plant. 

* Where special foundations, such as require piling, etc., have been 
necessary, the cost of such work should be deducted from values on which 
insurance is to be taken out. Depreciation is chargeable on these itemi 
owing to possible inadequacy and improvement in the art. 



CLASSIFICATION OF ACCOUNTS 37 

When classifying a bill for plastering, the notation 
made on the bill would be 2-004 (/), in which 2 would 
be the account number ; 004, General Mason Work ; and 
(/), Plastering. This is an extremely simple method 
of classifying and makes possible a rapid sorting of 
charges according to specific accounts and sub-classi- 
fications. 

These sub-divisions, as shown under * 'buildings" 
and as will be further shown under "permanent fix- 
tures," ''machinery," etc., should not be understood 
to be separate ledger accounts. They are used for the 
purpose of arriving at certain charges more readily, 
and for the further purpose of making a control over 
disbursements in any divisions more simple than would 
be possible where charges are grouped under one or 
two general classifications. These sub-classifications 
are usually analyzed through a subsidiary ledger where 
each classification is considered as a separate sub-ac- 
count. This subsidiary ledger is for the purpose of 
analyzing the charges on the main ledger account by 
classifications — "buildings account," for example — 
but does not affect the general ledger or its accounts 
in any way. The total of all charges made to the sub- 
classifications of any general ledger account as carried 
in the subsidiary ledger must always equal the charge 
as carried on the controlling account in the general 
ledger. 

Account No. 3. Permanent Fixtuees 

A permanent fixture is a structure, installation, or 
apparatus which is a part of the building equipment, 
usually having a fixed position or value regardless of 
occupant, and which is not used as a productive ma- 



38 SHOP EXPENSE ANALYSIS 

chine. The sub-divisions of the permanent fixtures 
account for a manufacturing plant may be classified 
as follows: 

001 Pertaining to Buildings. 

002 Pertaining to Power Plant. 

003 Pertaining to Water. 

004 Pertaining to Material. 

3-001 Permanent fixtures pertaining to buildings 
would include such charges as those for passenger ele- 
vators, fire protection system, factory internal tele- 
phone system, speaking tubes, heating system, gas illu- 
minating system, and pumps, piping, tanks, fittings, 
etc., for the factory water service. 

3-002 Permanent fixtures pertaining to power plant 
will include all fixtures for the — 

a Steam Generating System 

6 Steam Distributing System 

c Electric Current Generating System 

d Electric Current Distribution System 

e Transmission System 

/ Compressed Air System 

g Electric Illuminating System. 

3-002 {a) The steam generating system comprises 
all those fixtures used within the boiler room. It in- 
cludes such items as boilers and fittings, ash and coal 
conveyors, feed-water heaters and pumps, coal bunk- 
ers, etc. In plants where special railroad tracks are 
laid these should also be included, as should the cost 
of any special excavations, such as might be used for 
coal tanks or ash pits. 

3-002 (h) The steam distributing system comprises 
those fixtures installed from the main feed piping to 



CLASSIFICATION OF ACCOUNTS 39 

the place where the steam is used. In some of the 
larger plants the steam distributing system is split 
up into high-pressure and low-pressure systems, the 
low-pressure systems consisting mainly of that part of 
the main exhaust line installed particularly for the 
purpose of handling the exhaust steam for heating. 
All main lines, including underground conduit, piping, 
fittings, etc., used for the purpose of distributing steam 
are chargeable to this account. 

3-002 (c) The electric current generating system 
comprises the cost of engines, dynamos, switchboards, 
condensers, piping to engines and condensers, founda- 
tions for engines or djTiamos, and all trenches, deliv- 
ery mains, etc., connected with the generation of elec- 
tric current. 

3-002 (d) The electric current distributing system 
is chargeable with the cost of all wiring for circuits, 
special pipe conduits required by the National Board 
of Fire Underwriters, outlets, etc. It includes the cost 
of all cable and wiring from the feeder switch termi- 
nals in the engine room up to and including the con- 
trolling apparatus in each department or center of 
distribution. 

3-002 (e) The electric current transmission system 
covers all fixtures relating to line and jack shafting 
and to motors driving them. It includes the cost of 
pulleys, hangers, stringers, footing pieces, motors, 
platforms, switchboards at the centers of distribution, 
and all transmission equipment. 

3-002 (/) The compressed air distributing system 
includes the cost of all compressors, main pipe lines 
to hose or machine connections, headers, etc. 

3-002 ig) The electric illuminating system includes 



40 SHOP EXPENSE ANALYSIS 

all wiring from the distributing boards to arc and in- 
candescent lamps, extension cords, pulleys, etc. 

This description covers in a general way the scope 
of the several systems chargeable as ''pertaining to 
power ' ' under the ' ' permanent fixtures account. ' ' The 
importance of classifying all additions properly will 
be seen very readily when the purpose of making these 
distinctions is fully comprehended. For example, 
power expense charges are made in the same manner 
as the divisions that have been made above. The 
cost of generating a thousand feet of steam, the cost 
of generating electric current per kilowatt hour, the 
cost per cubic foot of compressed air manufactured, 
all depend directly on the proper classification of these 
charges for equipment. The face values are used as a 
basis for charging depreciation, insurance, and taxes, 
and as these charges form a part of the cost of gen- 
erating steam, electricity, or compressed air, an error 
in classifying the cost of any additions will affect the 
current costs for generating power. This power ex- 
pense is then distributed amongst the various manu- 
facturing departments where it is eventually absorbed 
by the production orders as a part of the "manufac- 
turing expense" applied against them. 

3-003 Permanent fixtures pertaining to water in- 
clude all fixtures used in connection with the factory 
water supply and distribution system. In some plants 
distinction is made between the water used for manu- 
facturing purposes only and that used for drinking 
and toilet purposes. However, a fine distinction of 
this nature is very seldom necessary for practical pur- 
poses. The items chargeable to permanent fixtures 
under this heading include all mains, pipe lines, ar- 
tesian wells, pumps, meters, tanks, fittings, etc., re- 



CLASSIFICATION OF ACCOUNTS 41 

quired by the supply system, and all wash bowls, sinks, 
traps, catch basins, piping, fittings, etc., used in con- 
nection with the distributing system. 

3-004 Permanent fixtures pertaining to material in- 
clude freight elevators, material scales, chutes, dry 
kilns (where installed), cranes, storage tanks for com- 
bustibles, and other similar equipment. 

The four main divisions of the "permanent fixtures 
account," namely, those pertaining to building, power 
plant, water, and material, respectively, as analyzed 
in the foregoing paragraphs, when properly classified 
all become controlling factors over the expense which 
we are interested in distributing correctly. Too much 
care cannot be used in the classification of equipment 
charges, as they form the basis for the proper distri- 
bution of manufacturing expense. 

Account No. 4. Machineby 

The machinery account may be arbitrarily divided 
into two classes — regular or standard type machinery 
and miscellaneous machinery. Regular machinery em- 
braces all that is commonly called "machinery." Mis- 
cellaneous machinery includes those non-portable fix- 
tures which are used in direct production and which 
are assessable, therefore, against the work which is 
performed, either directly or on a pro rata basis. It 
includes such items as ovens and furnaces, tanks, ket- 
tles, pots, vats, motors driving regular machinery, 
foundations for regular machinery, etc. 

All machinery should be numbered and a card record 
kept for each machine. Miscellaneous machinery 
should be distinguished from regular machinery by 
some identification mark, as for example by prefixing 



42 



SHOP EXPENSE ANALYSIS 



the letter "M" (meaning "miscellaneous") before 
the number assigned to each piece of miscellaneous 
machinery, thus, M-595. The installation and trans- 
portation charges should be included with the cost 
of all machinery and other plant equipment. When a 
machine is installed with the intention of removing 
it at some definite time, as, for example, such plant 
equipment as might be temporarily installed during 
the construction of a permanent plant which has al- 
ready been decided upon, then in such instances the 
cost of installation and transportation is charged di- 
rectly to shop expense. When a machine is transferred 
from one department to another, the destroyed por- 
tion, if any, should be written off and charged to shop 
expense, and any new portion which might be added 
should be charged as an addition to the machine 
through the machinery account. Monthly totals of ma- 
chinery sold or junked should be made up and checked 
against the totals charged to shop expense for plant 
written off. In cases where the depreciation reserve 
amounts to less than 100 per cent of the difference 
between the original and the junk value of the machine, 
the difference should represent the sum charged to 
shop expense for plant written off. A summary of 
plant items so discarded can be made up along the 
lines of the following report form: 



Invoice 
No. 


Plant Discarded 


Face 
Value 


Depreciation 


Junk Value 


No. 


Description 


Reserve 


Accrued 


Sales Pr. 


Profit 


Loss 





















classification of accounts 43 

Account No. 5. Small Tools 

Small tools may be divided into two classes, perma- 
nent and perishable tools. Those tools whose esti- 
mated life is over one year are known as permanent 
tools ; those less than one year, perishable tools. Per- 
manent tools include such items as punches and dies, 
templets and jigs, milling fixtures, etc. Perishable 
tools include emery wheels, files, hammers, plating 
racks, drills, cutters, and the like. Perishable tools 
should be written off the first year, while the depre- 
ciation rate for permanent tools depends on the policy 
of the management. It is, however, good conservative 
practice to write all permanent tools off in two years. 

Account No. 6. Pattekns 

Patterns may be divided into two main classes, metal 
patterns and wooden patterns. These in turn can be 
segregated into patterns of company manufacture and 
patterns borrowed. Care should be exercised in the 
keeping of all pattern records, owing to the fact that 
these records often become disarranged where pat- 
terns are loaned to or borrowed from other com- 
panies. All patterns outstanding at the time of in- 
ventory should be considered as if they were in the 
possession of the factory. While on its face this ac- 
count appears very easy to take care of, experience 
has shown that considerable trouble is met when a suit- 
able routine for the keeping of these records is not 
provided. 

Account No. 7. Shop Fixtures 

Shop fi:xtures are tangible unproductive installa- 
tions that are required by the shop departments to 



44 SHOP EXPENSE ANALYSIS 

assist them in carrying on their particular class of 
work. The account includes safety devices of all kinds, 
benches, lockers, portable scales, stools, tables, tool 
chests, trucks, wheel barrows, ladders, racks and shelv- 
ing in store rooms, and desks, adding machines, etc., 
used in the shop offices. 

This concludes the analysis of what are known as 
the Factory Plant Accounts. The purpose in mind has 
been to define in logical order each of these accounts 
and their sub-divisions, so that the charges made 
thereto, which will be used as a basis for making 
charges for depreciation, insurance, taxes and rent, to 
the manufacturing expense account, will be charged to 
the proper sub-classifications of expense to which they 
belong. 



Chapter IV 

DISTRIBUTING MANUFACTURING EXPENSE 
TO PRODUCTION CENTERS AND SEGRE- 
GATING POWER EXPENSE 

npHE purpose of the preceding chapters has been 
-■■ to show the sources from which manufacturing 
expense charges originate and the methods of assem- 
bling them by classification. After these charges have 
been assembled through the shop expense account they 
are then distributed to the various centers of produc- 
tion in accordance with certain clearly defined rules 
for each kind of expense. We will now consider these 
classes of expense from a distribution standpoint in 
the order below. 

Let us assume that an analysis of the shop expense 
account of a manufactory for the year 1916 showed 
up as listed on the following page. 

These represent the direct charges as classified dur- 
ing the year to each division of the expense account. 
Transfers must then be made between these divisions 
of expense for services rendered by one division to an- 
other. These are known as service charges. For ex- 
ample, rent expense is distributable to the different 
departments of the factory on the basis of floor space 
occupied. Therefore, a transfer must be made charg- 
ing power expense with the proportionate amount that 
the engine and boiler rooms must bear of the total 

48 



46 SHOP EXPENSE ANALYSIS 



Summary of Manufacturing Expense (Table I.) 



Administration Expense $ 49,419.90 

Power " 22,632.30 

Rent " 54,363.20 

Tool " 156,402.05 

Fixed Charges: 

Depreciation " 87,943.18 

Insurance " 359 . 31 

Taxes « 1,054.74 

Material « 35,128.07 

Unclassified " 1,209.71 

Idle Labor " 16,487.54 



Total Manufacturing Expense $425,000.00 



rent expense, this charge being made on the basis of 
percentage of floor space occupied by them. In like 
manner a transfer must be made between rent expense 
and material expense on the basis of space used for- 
storing material, and between power expense and tool 
expense on the basis of power furnished to the manu- 
facturing departments, etc. In this way all expense 
charges finally reach their proper destination. An 
analysis of these expense divisions will show how these 
transfers are made and how unit costs for power, rent, 
etc., are obtained. 

Administration Expense 

Administration expense is composed of expense 
charges incurred through the administration of the 
shop as a whole and through its various departments. 
It is made up of the salaries of superintendents and 
their assistants, salaries of the shop and office clerical 
force and the employment department, and any travel- 



ADMINISTRATION AND POWER EXPENSES 47 

ling, advertising, or office expense incurred by, for, or 
in connection with the proper administration of the 
shop organization. It includes service charges for 
rent and telephone, depreciation of and repairs to shop 
fixtures used by the shop administrative branch, 
wages of injured employees, insurance, pensions, tele- 
grams, etc. Administration expense consists of two 
parts, general and departmental. The departmental 
administration expense is charged directly to the de- 
partment incurring it, as, 'for example, the salary of 
the foreman of the punch press department, which 
would be assessed directly against that department. 
The general administration expense, which of course 
cannot be assessed directly against any one depart- 
ment, is distributed to all departments in proportion to 
the average number of employees in each department. 
The administrative branch of the shop is concerned 
directly with the personal or human element and ad- 
ministration expense is therefore distributed on that 
basis. 

An analysis of the administration expense, against 
which direct charges amounting to $49,419.90 have been 
made, shows that this amount is increased to $51,844.22 
through transfers made from rent expense on the basis 
of floor space occupied by the administrative and cleri- 
cal departments of the shop organization. A detailed 
analysis of administration expense with the addition 
of this service charge is shown in Table II on the 
following page. 

An inspection of this analysis will show that 
all of the administration expense has been trans- 
ferred to other divisions of expense; namely, tool ex- 
pense, power expense, material expense, and a small 
charge for service to other than shop departments. 



48 SHOP EXPENSE ANALYSIS 

This expense has been distributed on the basis of em- 
ployees, as previously outlined. 



Administration Expense (Table II.) 



Salaries : 

Shop Superintendent and Assistant $ 6,708.33 

" Cost Department 3,864. 15 

" Payroll " 2,009.00 

" Stenographic Department 2,234. 15 

Foreman's Clerks 2,679 . 70 

Special Studies 3,347 . 50 

Telephone Switchboard Operator 392 . 00 

Foremen 15,696.55 

Assistant Foremen 11,100.90 

Depreciation on Shop Fixtures (pertaining only 

to administration) 294 . 79 

Insurance on Shop Fixtures .82 

Taxes on Shop Fixtures 2.41 

Telephones, Rental and Calls 240.00 

Telegrams .97 

Traveling Expense (pertaining only to the shop 

organization) 6 . 80 

Stationery 841 .83 



Total Direct Administration Expense $49,419 . 90 

Service Charges— Rent 2,424.32 



Grand Total Administration and Clerical 
Expense $51,844.22 



Transfers to other Divisions of Expense: 

Tool Expense $60,967.89 

Power Expense 78.47 

Material Expense 673.07 

Other than Shop Accounts 125. S9 $51, 8U . 22 

Balance $ 000.00 



administbation and poweb expenses 49 

Power Expense 

The next division of manufacturing expense requir- 
ing analysis is power. 

Power expense is made up of all expense incurred 
in generating, distributing, and transmitting power. 
It can usually be divided into about six distinct di- 
visions similar to those made according to systems in 
the classification of *' permanent fixtures pertaining 
to power" in the preceding chapter. These lines of 
division are as follows: 

Steam Generating Expense 
Steam Distributing Expense 
Electric Current Generating Expense 
Electric Current Distributing Expense 
Transmission Expense 
Compressed Air Expense 

Steam expense is distributable on the basis of the 
number of thousand pounds of steam used; electric 
current on the basis of kilowatt hours ; and compressed 
air on the basis of cubic feet. In order to know the 
unit costs for each of these divisions of power, the 
expense incurred must be classified accordingly. The 
importance of classifying power equipment according 
to the same divisions as outlined in the preceding chap- 
ter will, therefore, be readily appreciated ; as it would 
be impossible to make charges for depreciation, insur- 
ance, and taxes in proper proportion to each system 
unless the face values as indicated on the ''permanent 
fixtures" account were classified in like manner. 

The remarkable progress which has been made in 
piping steam from large central generating stations 
and selling it at so much per thousand pounds, in 
much the same manner as electric current, water, and 



50 



SHOP EXPENSE ANALYSIS 



Power Expense Summakt (Tablh III.) 



Depreciation of: 

Steam Generating System | 1,213 .75 

General High-Pressure Steam Distributing System 120 . 00 

General Low Pressure Steam Distributing System 204 . 30 

Electric Current Generating System 906 . 30 

Electric Current Distributing System 360 . 00 

Compressed Air System 261 .30 

Transmission System 1,997 . 53 

Electric Illuminating System 444 . 20 

Insurance on: 

Steam Generating System 3 . 29 

General High-Pressure Steam Distributing System .27 

General Low-Pressure Steam Distributing System .55 

Electric Current Generating System 2 .46 

Electric Current Distributing System 1.10 

Compressed Air System .82 

Transmission System 6 . 48 

Electric Illuminating System 1 . 10 

Taxes on: 

Steam Generating System 9.17 

General High-Pressure Steam Distributing System .76 

General Low-Pressure Steam Distributing System 1 . 53 

Electric Current Generating System 6 . 88 

Electric Current Distributing System 3 . 06 

Compressed Air System •. 2 . 29 

Transmission System 15 . 29 

Electric Illuminating System 3 . 06 

^°*' { BoUer^Rw^ 1 ^"^<=® Charge Transferred from Rent Expense. . . { ^'J^^ ' |f 

Coal 5,492^37 

Wharfage on Coal Boats 31. 64 

Cartage on Coal 890 . 55 

Supplies: 

Oils 262.80 

Waste 151 .76 

Unclassified 33 .92 

Electric Illuminating System 267 . 47 

Water Purchased 414 . 56 

Repairs and Changes to: 

Steam Generating System 226 . 98 

General High-Pressure Steam Distributing System 22 . 58 

General Low-Pressure Steam Distributing System 16 . 26 

Electric Current Generating System 169.65 

Electric Current Distributing System 67 . 27 

Compressed Air System 48 .98 

Transmission System 372 . 80 

Electric Illuminating System 35.15 

Power Purchased: 

For Power 255.61 

For Illumination 115.92 

Depreciation, Insurance and Taxes on Shop Fixtures 6.04 

General Administration Expense (Service Charge transferred from Adminis- 

tration Expense) 78.47 

Salaries: 

Chief Engineer (Part) 1,440.00 

Assistant Engineer 1,248.00 

Oilers and Wipers 1,754 . 15 

Firemen 948 . 75 



Grand Total Power Expense $22,632.30 



ADMINISTRATION AND POWER EXPENSES 51 

gas can be bought, has made the compilation of power 
cost data a matter of prime importance to the factory- 
management. Comparisons between private costs and 
market prices for power will show very quickly from 
which direction economy can be derived. It is natu- 
rally understood that it is not always possible to buy 
power nor advisable to buy it from outside sources, 
even when an apparent saving will result therefrom. 
These are questions which must be decided by the man- 
agement in each case; however, control cannot be ex- 
ercised in either case unless the facts are presented in 
a way to make this control possible. 

A specimen power expense report is presented on 
page 50 to give a general idea as to the various items 
included in power expense. 

Salaries, as included in the sub-classifications on the 
specimen power expense report, are chargeable to the 
respective systems as follows: 

Salaries of the chief engineer and his assistants 
are chargeable to all power systems on the basis 
of number of employees in each. 

Salaries against the steam generating system 
include wages of firemen, expense of handling 
coal and ashes, and supervision expense. 

Salaries against the electric current generating 
system include wages of engineers, dynamo ten- 
ders, switchboard attendants, and supervision. 

Salaries against the electric current distribu- 
tion system include care of machines in the line 
of distribution, inspectors, and supervision. 

Salaries against the transmission system in- 
clude wages of oilers and wipers, motor cleaners, 
etc., on line shafting, and supervision expense. 



52 SHOP EXPENSE ANALYSIS 

Salaries against the compressed air system in- 
clude wages in connection with inspection, at- 
tendance, and supervision. 

The sub-classification "general administration ex- 
pense" includes that part of the general administra- 
tion expense of the shop chargeable to the power plant. 
It is divided amongst the several power systems pro- 
portionally to the number of employees used on each 
system. 

Where power plants of more than 500 horsepower 
are required, special attention should be paid to the 
handling of coal and ashes and the expense incidental 
thereto. The installation of mechanical stokers, con- 
veyors, and improved devices of many kinds designed 
to facilitate the handling of coal and ashes on a large 
scale have been conducive to a much lower cost for 
labor than was thought possible a few years ago in con- 
nection with steam generation. This phase of power 
plant expense has attained a much greater degree of 
importance, and data must now be available to make 
possible the proper control over it. While fixed 
charges, repairs, etc., on such mechanical equipment 
will increase, it should be remembered that this equip- 
ment is making lower cost of operation possible 
through the greater reduction of cost in other items, 
and, therefore, comparisons should be made at peri- 
odic intervals between the increased expense on the 
one hand for machinery and the reduction in labor on 
the other. 

The shrinkage of coal in bins is also an item worthy 
of consideration. In most of the larger plants tanks 
have been built especially for storing coal under wa- 
ter. This prevents the volatile matter in the coal from 



ADMINISTRATION AND POWER EXPENSES 53 

working off as would be the case were the coal exposed 
to the air with constant decomposition taking place. 
Other items of power expense to be considered are 
w^harfage on coal boats where the coal is delivered by 
water, and demurrage on coal cars where deliveries 
are made by rail. 

A recording wattmeter attached to the switchboard 
in the engine room should be used as a means of watch- 
ing power consumption each day. A study of the rec- 
ords will show, in all probability, quite marked drops 
in the power used due to slack periods on the part of 
machine operators; such periods can be remedied by 
a closer study of conditions during the time when the 
slacking up occurs. A wattmeter installed in every 
manufacturing department will show in which depart- 
ment the greatest losses are occurring; comparisons 
can then be made, and the attention of the department 
foremen called to this factor of waste. This waste may 
occur because a large part of the line shafting is in 
operation and consuming power while only a few ma- 
chines are working up to their full capacities. 

The ammeter on the main switchboard in the engine 
room will serve the purpose for making these obser- 
vations fairly well where a recording wattmeter is 
not available. Assuming the voltage to be more or 
less constant, a reading of the ammeter every half 
hour will indicate any drops in power consumption, 
and comparisons made from day to day by plotting 
these readings on cross section paper, using the time as 
abscissae and the amperage as ordinates, can be used 
as a means of locating this factor of waste. A study 
of this kind, made from ammeter readings in a factory 
employing a thousand workmen, showed sudden drops 
at 11 a. m. and 4 p. m. The morning drop was due to 




54 



ADMINISTBATION" AND POWER EXPENSES 55 

a general slowing up on the part of the machine opera- 
tors in the latter part of the forenoon; the afternoon 
drop to the reluctance of workmen to start work on 
new jobs if they happen to finish their old work after 
4 p. m., and also to the "washing up" period which 
started considerably ahead of the closing hour, 5 p. m. 
Chart I shows clearly when these losses occur. 

When summarizing power expense by systems, trans- 
fers must necessarily be made from one system to an- 
other according to the power bought and sold by each 
system. For example, if the total cost of generating 
steam was $10,000, and if all this steam was used in 
generating electric current, then a transfer would have 
to be made charging the electric current generating 
expense with $10,000 for steam purchased from the 
steam generating system, and crediting steam generat- 
ing expense with this same amount. Assuming that 
the direct charges to ''electric current generating ex- 
pense" were $5,000, then the total cost of electric cur- 
rent available at the bus bars would be $15,000. Then, 
for example, if the total kilowatt hours generated 
amounted to 750,000, the cost per kilowatt hour would 
be two cents. 

In a similar manner transfers would be made from 
"electric current generating expense" to "electric 
current distributing expense," and from "electric 
current distributing expense" to "transmission and 
illuminating expense ' ' respectively. In this way power 
expense charges are finally closed out into their proper 
channels and costs for generating and transmitting all 
kinds of power can be derived accurately. How these 
power expense items are finally closed out into either 
machine expense or material expense is showed on 
Chart II. 



POWER EXPENSE DISTRIBUTIOH 



} Stcam GencRATiNe £"xpcw5£ j 



|F ' 



r 



Elbctric Curreht 

CcNErtATina EXPCHSI 



s 



Electric CuRRerrr 
DiS TRIBUTING ExpeHSl 






Electric 

Illuminating 

Ekpensc 



Rent Expense 



JO o 



■S o ^ 



Si! 



Material 
Expense 



Machine 
Expense 



51 



PonER 
TRANSMlSSIOn 

Expense 



material 
Expense 



1i 



Machine 
Expense 



Ma tcrial 
Expense 



CohpressedAi, 
Expense 



Machine 
Expense 



Total PorrERExPEHit 

Cmarguble to 
MATERIAL EXPEmi 



Total Power Expense 

CMAReCABLE TO 

MATERIAL EXPENSE 



Machine 
Expense 



N. T Fieirtn. 



CHART II. SHOWING HOW STEAM GENERATING EXPENSE IS 

FINALLY CLOSED OUT TO MATERIAL EXPENSE AND 

MACHINE EXPENSE 

56 



ADMINISTRATION" AND POWER EXPENSES 57 

It should be understood that the scheme of power 
expense distribution as shown on Chart 11 is subject 
to modifications in order to make it apply to special 
conditions. For example, the low-pressure (exhaust) 
steam used for heating and which is chargeable to rent 
expense is not indicated among the expenses on the 
accompanying chart. 

Let us assume that after analyzing the total power 
expense by systems we find the total against each sys- 
tem to be as follows: 



Analysis of Power Expense (Table IV.) 



Steam Generating System $10,571 . 13 

Steam Distributing (High-Pressure) System. . , 143.61 

Steam Distributing (Low-Pressure) System .... 222 . 64 

Electric Current Generating System 6,062 . 23 

Electric Current Distributing System 431 .43 

Compressed Air System 1,223 . 26 

Transmission System 3,111 . 10 

Electric Illuminating System 866 . 90 



Total Power Expense $22,632.30 



Then assuming that the total pounds of steam gen- 
erated during the period against which these figures 
apply amounted to 25,931,500 pounds, the cost per thou- 
sand pounds of steam generated would be $0,408. 
The details of the analysis by systems are shown in 
Table V. 

After the steam has been generated it must then be 
distributed, the exhaust steam being used for heating 
and the live steam for manufacturing purposes. A 
transfer should be made, therefore, closing out all 
of the stea/m generating expense into steam distribut- 
ing expense as a service charge. The direct charges to 



68 SHOP EXPENSE ANALYSIS 



Steam Generating Expense (Table V.) 

Power Expense, Steam Generating System, refers to all expense relat- 
ing to boilers, fittings, and pipings for steam used within the boiler room. 



Depreciation of Permanent Fixtures $1,213.75 

Insurance on Permanent Fixtures 3 . 29 

Taxes on Permanent Fixtures 9 . 17 

Rent 940.84 

Coal 5,492.37 

Wharfage 31 .64 

Cartage of Coal 890. 55 

Water 414. 56 

Repairs and Changes to Permanent Fixtures. . . 226 . 98 

Administration 39 . 23 

Salary, Chief Engineer (Part) 360 . 00 

Salary, Firemen 948. 75 



Total Direct Expense $10 571 . 13 

Transfers to Other Accounts (Steam Distributing 

System) 10,571.13 



Balance $ 0.00 



Total Pounds of Steam Generated 

in the Boiler Room 25,931,500 

Cost per 1,000 pounds $0,408 



steam distributing expense, together with the service 
charge for steam purchased from the steam generating 
system, would then appear as shown in Table VI. 

An inspection of these figures will show that the 
cost of steam distributed to the permanent connections 
where the steam was used amounted to $10,714.74. On 
the basis of estimates furnished by the chief engineer, 
this expense of generating and distributing steam is 
transferred to the electric current generating system, 
material expense, and tool expense, in a ratio directly 
proportioned to the steam each has used, the figures 
being derived as shown in Table VII. 



General High-Pressuke Steam Distributing Expense (Table VI.) 

Power Expense, General High-Pressure Steam Distributing System, 
refers to all expense relating to piping, fittings, etc., from the connection 
with the main feed piping to the local permanent connection where the 
steam is used. 



Depreciation of Permanent Fixtures $ 120.00 

Insurance on Permanent Fixtures .27 

Taxes on Permanent Fixtures .76 

Repairs and Changes to Permanent Fixtures. . . 22 . 58 

Total Direct Expense $ 143 . 61 

Service Charges — Steam Generating Expense . . 10,571 . 13 

Grand Total Steam Generating and Dis- 
tributing Expense $10,714.74 

Transfers to other Accounts: 
Electric Current Generating Sys- 
tem $7,928.91 

Material Expense 594. . 67 

Tool Expense 2,191.16 $10,714.74 

Balance $ 0.00 

Cost per thousand pounds of steam 

distributed $0 .414 



Distribution of Steam Expense on Consumption Basis (Table VII.) 


Steam Used by 


Lb. of 
Steam 


Expense 


Chargeable to 


Elec. Cur. Gen. System . . . 
Steam Hammers 


19,188,850 
1,944,875 

1,439,255 

479,775 
479,795 
335,890 
383,865 
239,940 
1,439,255 


$ 7,928.91 
803.60" 

594.67 

198.22 - 
198.22 
138.76 
158.58 
99.11 
594.67 


El. Cur. Gen. Exp. 

Tool Expense 
$2,191.16 

Material Exp. 


Nickel Plating and Wash- 
ing Tanks 


Special Pump for Pressure 
Tests 


High-Pressure Pumps 

Oil Pump for Foundry .... 
Vacuum Pump 


Misc. Mfg. Purposes 

Freight Elevator Pumps. . . 


Total 


25,931,500 


$10,714.74 





59 



60 SHOP EXPENSE ANALYSIS 

The direct and service charges to electric current 
generating and distributing expenses respectively are 
obtained in much the same manner as that followed in 
the steam system. These expense figures are analyzed 
and summarized in Tables VIII and IX. 

Transfer of these expenses are made on the basis of 
consumption. Compressed air, transmission, and illu- 
minating expenses are shown in Tables X, XI, and XII. 



Electric Current Generating Expense (Table VIII.) 

Power Expense, Electric Current Generating System, refers to all 
expense relating to engines, dynamos, switchboards, condensers, and 
piping. 



Depreciation of Permanent Fixtures $ 906 . 30 

Insurance on Permanent Fixtures 2 . 46 

Taxes on Permanent Fixtures 6 . 88 

Chief 'Engineer (Part) 360.00 

Assistant Engineer (Part) 936 . 00 

Oilers and Wipers 1,315 . 61 

Supplies: 

Oil 197.10 

Waste 113.82 

Unclassified 33 . 92 

Administration 29 . 43 

Depreciation, Insurance and Taxes on Shop Fix- 
tures (Oil Tanks, etc.) 6.04 

Power Purchased (For Power) 255 . 61 

Repairs and Changes 169 . 65 

Rent 1,729.41 



Total Direct Expense $ 6,062.23 

Service Charges — Steam Generating Expense. . 7,928.91 



Total Electric Current Generating Expense $13,991 . 14 
Transfers to Other Accounts {Eledric Current 

Distnhuting) 13,991.14 



Balance $ 0.00 



ADMINISTRATION AND POWER EXPENSES 61 



Electric Current Distributing Expense (Table IX.) 

Power Expense, Electric Current Distributing System, refers to all 
expense relating to main distributing cables and wiring from feeder 
switch terminals in engine room up to and including the first centers of 
distribution in each building, and from there to the permanent terminals 
at the controlling apparatus or equivalents. 



Depreciation of Permanent Fixtures $ 360 . 00 

Insurance on Permanent Fixtures 1.10 

Taxes on Permanent Fixtures 3 . 06 

Repairs and Changes to Permanent Fixtures. . . 67 . 27 



Total Direct Expense $ 431 .43 

Service Charges (Electric Current Generated). . 13,991 . 14 



Total Electric Current Generating and Dis- 
tributing Expense $14,422 . 57 

Transfers to Other Accounts: — 

Transmission System $10,841 . 61 

Compressed Air System 2,013 .57 

Electric Illuminating System .... 966 . 53 
Freight Elevators, Material Ex- 
pense 600.86 14,4.22.57 



Balance $ 0.00 



Total Kilowatt Hours Generated 

and Distributed 693,522 

Cost per Kilowatt Hour $ 0.021 



Having made all transfers we find the final distri- 
bution of power expense to be as follows: 

Tool Expense $19,380.70 

Material Expense 1,195.53 

Rent Expense 2,056 . 07 



Total $22,632.30 

This final total agrees with the total ''power ex- 
pense" as given on page 57, and concludes the dis- 
tribution of power expense by systems. Tool expense 
is closed out into machine expense. 



COMPKBSSBD AlB EXPBNSB (TabLE X.) 

Power Expense, Compressed Air System, refers to all expense relat- 
ing to air compressors, main pipe line to hose or machine connections, 
headings, etc. 



Depreciation of Permanent Fixtures $ 261 .30 

Insurance on Permanent Fixtures .82 

Taxes on Permanent Fixtures 2 . 29 

Repairs and Changes to Permanent Fixtures. . . 48.98 

Oils 65.70 

Waste 37.94 

Salaries : 

Assistant Engineer (Part) 312 . 00 

Oilers and Wipers 438 . 54 

Administration 9.81 

Rent 45.88 

Total Direct Expense $ 1,223.26 

Service Charges (Electric Current Distributing 

Expense) 2,013.57 

Total Compressed Air Expense 3,236 . 83 

Transfers to Other Accounts {Tool Expense) .... 3,236.83 

Balance $ 0.00 

Transuission Expense (Table XI.) 

Power Expense, Transmission System, refers to all expense relating 
to hne and jack shafting and the motors driving same, pulleys, hangers, 
stringers, etc. 

Depreciation of Permanent Fixtures $ 1,997. 53 

Insurance on Permanent Fixtures 5 . 48 

Taxes on Permanent Fixtures 15 . 29 

Repairs and Changes to Permanent Fixtures. . . 372 . 80 

Salary Chief Engineer (Part) 720 . 00 

Total Direct Expense $ 3,111 . 10 

Service Charges (Electric Current Distributing 

Expense) 10,841 .61 

Total Power Transmission Expense $13,952. 71 

Transfers to Other Accounts (Tool Expense) .... 13,952.71 

Balance S 0.00 

62 



ADMINISTBATION AND POWEK EXPENSES 63 



Electric Illuminaxinq Expense (Table XII.) 

Lighting Expense, Electric Illuminating System, refers to all expense 
relating to distributing mains (light), wiring, arc lamps, pulleys, and 
other fixtures, incandescent lamps, clusters, stands, rosettes, guards, 
extension cord, etc. 



Depreciation of Permanent Fixtures $ 444.20 

Insurance on Permanent Fixtures 1.10 

Taxes on Permanent Fixtures 3 . 06 

Supplies 267.47 

Repairs and Changes 35 . 15 

Power Purchased (For Lighting) 115.92 

Total Direct Expense $ 866.90 

Service Charges 966 . 53 

Total Electric Illuminating Expense $1,833.43 

Transfers to Other Accounts {Rent) 1,833.43 

Balance $ 0.00 



Chapter V 

THE STANDAEDIZATION OF RENT EXPENSE 
DISTRIBUTION 

TN the preceding chapter a detailed analysis was 
-*■ made of administration and power expense charges 
as divisions of manufacturing expense. We found 
that administration expense, for example, is distributa- 
ble to production centers on the basis of the number 
of employees in each center; we likewise found that 
power expense is distributable on the basis of units 
of power. In other words, our analysis has shown thus 
far that each division of manufacturing expense is 
distributable according to some distinct method of pro- 
cedure. Rent expense, which we are about to analyze, 
is proportioned to manufacturing centers on the basis 
of floor space occupied; the unit of distribution is, 
therefore, the square foot, and the method to be fol- 
lowed in arriving at this charge per unit is herewith 
outlined. 

Rent expense may be arbitrarily divided into two 
parts : (a) Fixed charges pertaining to grounds, build- 
ings, and "rent permanent fixtures" {i.e., permanent 
fixtures pertaining to buildings), and (b) Annual main- 
tenance. Under (a) should be included: 

1 Depreciation on all buildings 

2 Depreciation on rent permanent fixtures (this includes such 

64 



KENT EXPENSE, 65 

permanent fixtures as are common to the whole building 
and which were specified in the preceding chapter under 
"permanent fixtures pertaining to buildings") 

3 Insurance on all buildings and on "rent permanent fixtures" 

4 Taxes on grounds (except such grounds as are considered 
as surplus, i.e., purchased in advance of present requirements) 
Taxes on buildings 

Taxes on " rent permanent fixtures " 

5 Interest on investment (consisting of interest computed at 
a reasonable rate on net value — the face values of grounds, 
exclusive of surplus — on buildings and on "rent permanent 
fixtures," less all depreciation on plant written off to date. 
Mortgages or bonds outstanding against the property should 
not bededucted) 

Under (b), Annual Maintenance, such items of ex- 
pense as the following would be included: 

1 Salaries of janitors, sweepers, cleaners, watchmen, passenger 
elevator operators, fire brigade, etc. 

2 Lighting (depreciation of lighting plant, or proportion of 
power consumed in lighting) 

3 Fuel for heating 

4 Repairs to building 

5 Repairs to "rent permanent fixtures" 

6 Changes to buildings and "rent permanent fixtures" 

7 Amounts written off buildings and "rent permanent fix- 
tures" 

8 House service supplies, such as soap, towels, toilet, and jani- 
tor supplies. 

A summary of rent expense made according to these 
two divisions and applied separately against the total 
number of feet of effective floor space will give a rate 
per square foot for both fixed charges and main- 
tenance. Comparisons can then be made between the 
expenses of different periods and any abnormal varia- 
tions can be easily located. 

In order to arrive at the total effective floor space 
the following items should be taken into considera- 



66 SHOP EXPENSE ANALYSIS 

tion : All space in buildings which might be used for 
factory, warehouse, or office purposes, including aisles, 
engine and boiler rooms, toilet rooms, stairways and 
elevator shafts (excluding light shafts), pillars, and 
walls; all open yards used in the carrying on of the 
manufactory's business, including such space as might 
be used for the storage of raw material, scrap, etc., also 
any roofs used for such purposes; and all driveways, 
courts, railroad tracks, and other facihties owned by 
the company and used for shipping or receiving mer- 
chandise. 

In oases where buildings are rented the total annual 
rent charge to expense should include annual rent paid, 
and annual maintenance which is not included in rent 
paid. 

When figuring depreciation, insurance, and taxes, 
net values of plant should be used as a basis for 
making calculations. This means that from the face 
values of buildings and ''rent permanent fixtures," 
deductions must be made for all depreciation which has 
previously been written off together with the accrued 
depreciation up to the end of the current year. No de- 
ductions, however, should be made for "mortgages" 
or "bonds payable." All rates used should first have 
the approval of the management as they directly affect 
the manufacturing expense charge which we are inter- 
ested in distributing to costs of production. In classi- 
fying direct charges to "rent expense" during the 
year, the same procedure should be followed as ex- 
plained in Chapters III and IV. 

In Chapter III, we designated the shop expense 
(manufacturing expense) account as Account No. 11. 
For sub-classification purposes let us assume that all 
numbers from 100 to 199 inclusive were assigned to 



BENT EXPENSE 67 

administration expense; all from 200 to 299 were as- 
signed to power expense, and all from 300 to 399 to 
rent expense. A reference list of these classifications 
pertaining to ''rent expense" for the year would be 
made up as follows: 

RENT EXPENSE 
CLASSIFICATION REFERENCE LIST 

301 Changes to buildings and rent permanent fixtiu-es 

302 Depreciation on buildings and rent permanent fixtures 

303 Drawings and surveys 

304 Inspection and supervision of maintenance of buildings 
and fixtures 

305 Interest on investment in grounds, buildings, and rent 
permanent fixtures 

306 Renting other buildings 

307 Repairs to buildings and street paving 

308 Repairs to rent permanent fixtures 

309 Repairs and iuspection of passenger elevators 

310 Supplies for cleaning 

311 Supplies for fire protection (not including apparatus) 

312 Supplies for watchmen (oil, lanterns, etc.) 

313 Stationery 

314 Salaries, attendants to heating system, fire brigade, etc. 

315 Salaries, passenger elevator operators 

316 Salaries, pumping station (fire and house service) 

317 Salaries, sweepers 

318 Salaries, ushers and watchmen 

319 Taxes on grounds, buildings, and rent permanent fixtures 

320 Watch box service 

321 Water (other than for manufacturing uses) 

322 Unclassified rent expense 

323 Service charges for light (Brought forward from power 
expense and from gas expense) 

324 Service charges (Brought forward from administration ex- 
pense) • 

325 Transfers to other accounts (credits) 

The ''shop expense account" has been referred to 
as Account No. 11, and as rent expense is simply one 



68 SHOP EXPENSE ANALYSIS 

of the divisions of shop expense, then, by using the 
reference list of sub-classifications made up for each 
division of expense, we would classify charges pertain- 
ing to any kind of expense according to the classifica- 
tion numbers assigned thereto. For example, "renting 
of other buildings ' ' would be classified 11-306, by which 
(11) would denote the account number and (306), being 
in the three hundreds, would designate the charge im- 
mediately as a rent expense item, the details as to kind 
of expense being obtainable by reference to the classi- 
fication list. 

To the direct charges to rent expense as made dur- 
ing the course of the year, transfers must now be made 
for ' ' service charges ' ' from other divisions of expense. 
For example, a transfer must be made from that di- 
vision of manufacturing expense known as ''fixed 
charges" for the proportion of depreciation, insur- 
ance, and taxes chargeable to "buildings" and to "rentr 
permanent fixtures," and for taxes on "grounds," as 
these form part of the rent expense. Transfers must 
also be made in like manner from "power expense" 
to "rent expense" for electric illumination, etc. By 
adding these service charges to the direct charges the 
total expense chargeable against ' ' rent ' ' can be arrived 
at. The classifications for use in making the transfer 
entries in the subsidiary expense ledger are included 
with those listed above. (See sub-class 325 under Eent 
Expense.) 

As we are interested in determining a rent rate per 
square foot foruboth fixed charges and maintenance as 
included under rent expense, let us analyze the annual 
rent charge of $54,363.20, stipulated in Chapter IV, 
according to these lines of distinction. This analysis 
would then appear as follows : 



RENT EXPENSE 69 



Statement of Annual Rental Expense and Cost of Effective Floor Space 
for the Year 1915 


Fixed Charges: 






Depreciation on Buildings and 






Rent Permanent Fixtures . . 


$ 5,686.96 




Insurance on Buildings and Rent 






Permanent Fixtures 


27.10 




Taxes on Buildings and Rent 






Permanent Fixtures 


104.86 




Interest on Investment in Grounds, 






Buildings, and Rent Per- 






manent Fixtures (Figured at 






5% of Net Values) 


7,279.33 




Rental of (2) Buildings from 






A. B. C. Realty Co 


25,000.00 


$38,098.25 


Maintenance: 






Repairs and Changes to Buildings $ 4,419 . 74 




Repairs and Changes to Rent 






Permanent Fixtures 


110.83 




Salaries Watchmen and Door- 






keepers 


2,103.05 




Salaries Sweepers and Cleaners . , 


3,852.50 




Salaries Yardmen 


780.00 
1,872.17 




Water (House Service) 


Fire Protection Expense 


493.50 




Supplies for Cleaning 


169.25 




Gas Purchased 


1,031.84 




Electric Illu- f Power purchased 


115.92 




minating i Power generated 
Expense [ Supphes 


966.53 




267.47 




Drinking Water Expense 


82.15 


S16,264.95 




Total Annual Rent Cost .... 




$54,363.20 







A summary of floor space against which the above 
expense is applicable would then be made and shown 
in the following manner: 



70 SHOP EXPENSE ANALYSIS 



Manufacturing space 29,742 sq. ft. 

Material " 26,666 " « 

Office " 4,723 " " 

Space used for other than Material or Manu- 
facturing 6,063 " " 



Total Occupied Space 67,194 sq. ft. 

Unoccupied Space 38,719 " " 



Grand Total Floor Space 105,913 sq. ft. 



RESUME 

Number of square feet effective floor space 105,913 

Fixed charges per square foot $0 . 3597 

Maintenance per square foot . 1536 



Total rental cost per square foot $0. 5133 



Having established a rent expense rate of $0.5133 
per square foot, transfers can now be made to power 
expense on the basis of floor space occupied by the 
engine and boiler rooms ; to material expense for space 
used by storerooms ; and to machine and tool expense 
for space used for manufacturing purposes, etc., the 
charge in each case being determined by multiplying 
the number of feet of floor space occupied by the rate 
of $0.5133. These transfers would be shown as fol- 
lows: 



Total Annual Rent Cost $54,363.20 

Transfers to Other Accounts: 

Power Expense $2,716. 13 

Material Expense 11,213.55 

Tool Expense 15,119.46 

Administration and Clerical Ex- 
pense 2,424.32 

Shipping Expense 2,474. 11 

Engineering and Draughting 504 . 20 $34,451 . 77 



Balance $19,911 .43 



BENT EXPENSE 71 

The balance indicated is equivalent to the charge 
against 38,719 square feet of unoccupied floor space. 

By using a method similar to the one here outlined 
for determining a rate per square foot of floor space 
for both fixed charges and maintenance, a basis of com- 
parison can be established between the rent expense 
of different periods and as a basis for arriving at de- 
cisions as to the purchase, rental, or construc- 
tion of new buildings. It is also a means of 
showing very clearly the actual expense involved 
through carrying surplus space. An analysis of this 
kind has been known by the writer to have resulted 
in an entire rearrangement of production centers and 
storage space, so that the excess floor space could be 
rented and a fair income derived therefrom. 

The method herein outlined for analyzing the annual 
rent charge is of course subject to modifications to 
meet existing conditions at the plant where it is to be 
applied. In some instances a much more elaborate 
system of classification and a more detailed analysis 
may be necessary. For example, where "water for 
house service ' ' has simply been given one sub-classifi- 
cation, (321) in the reference list of classifications, in 
extensive manufacturing establishments, similar to the 
large steel mills, railroad repair shops, or brass mills, 
the charge for water expense chargeable to rent alone 
might necessarily have to be divided into five distinct 
classes, as : a, Fire protection, hydrants and sprinklers ; 
h, grounds service ; c, house service for toilets ; d, drink- 
ing water ; e, high-pressure service for power for ele- 
vators. For these charges classification immbers from 
330 to 349 could be assigned and used. Where divisions 
of this nature are necessary the expense is distributed 
to the respective systems on the basis of cubic feet of 



72 SHOP EXPENSE ANALYSIS 

water used as indicated by the meter readings, and 
where this is not possible the distribution is made on 
the basis of estimated consumption. 

As mentioned in the preceding chapter on power 
expense distribution, light or illuminating expense is 
chargeable to rent. This introduces another factor 
which has to be taken into consideration at certain 
plants, that of generating gas. Where this is done, the 
classification of expense pertaining thereto should be 
made in a manner similar to that shown below : 

GAS GENERATING EXPENSE 

350 Accidents 

351 Belting on machine 

352 Changes to gas plant 

353 Depreciation on generating, purification, and distributing 
equipment, and buildings 

354 Generator fuel (coke, coal, etc.) 

355 Enrichers (oil, etc.) 

356 Purification materials (iron oxide, shavings, etc.) 

357 Rags, oils, cleaning supplies, waste, etc. 

358 Repairs to buildings and fixtures 

359 " " machinery and tools 

360 Insurance 

361 Taxes 

362 Wages of gas maker and assistants 

363 " " clinker and ashmen 

364 Inspection expense 

365 Service charges (brought forward) 

366 Transfers to rent (class. No. 323) and other accounts 
(credits) 

It will be noted that the classification numbers as- 
signed to the above reference list are in the 300 class. 
This has been done because of the fact that practi- 
cally all of this expense is finally closed out into rent 
expense, of which it really forms a part because the 
gas generated is used for illumination purposes. Any 
gas distributed for direct manufacturing uses, such as 



RENT EXPENSE 73 

gas ovens, heaters, blow pipes, etc., would be charged 
to "machine and tool expense," through the transfer 
classification number 366. 

Still another possible division of expense chargeable 
to rent is that of the care and upkeep of grounds. 
This has become a factor of considerable importance 
of late years, because manufacturers are appreciating 
the importance of desirable and attractive surround- 
ings to the w^orks proper as an inducement to labor. 
It is a proven fact that where large, well-ventilated 
rooms with abundance of light are provided increased 
efficiency has resulted therefrom. In the same way, 
if the outlook from the interior of the factory is over 
spacious, well-kept, green lawns spotted here and there 
with shrubbery, the expense involved will be repaid 
many fold through ditferent sources. Many of the 
larger plants, especially, have laid out tennis courts, 
baseball diamonds, and running tracks on the grounds 
adjacent to or surrounding the factory buildings, all 
for the use of their employees. The competition stirred 
up in this way between different departments and with 
other organizations has resulted in immeasurable bene- 
fits, and the scheme is now being applied wherever 
conditions and locations permit. 

However, all this involves extra expense, and this 
expense, like all other kinds of expense, must be con- 
trolled in order to derive the maximum return on the 
expenditure involved. The care and upkeep of grounds 
are chargeable to rent expense, and as these expenses 
must necessarily be classified, a reference hst of classi- 
fications should be made up in the following manner : 

RENT EXPENSE " GROUNDS" 

375 Changes to fences, driveways, walls, gates, houses, etc. 

376 Depreciation on houses used as part of the grounds 



74 SHOP EXPENSE ANALYSIS 

377 Depreciation on fixtures, etc. 

378 Insurance on houses, equipment, etc. 

379 Repairs 

380 Salaries, superintendent of grounds and watchmen 

381 Salaries, care and upkeep of grounds 

382 Taxes 

383 Service charges — water (transferred from water expense) 

384 Service charges — administration (transferred from admin- 
istration expense) 

385 Transfers to rent (closed out into classification No. 321) 

A method of expense segregation along the lines here 
indicated makes possible a control over each sub-di- 
vision of rent expense not possible where the charges 
are all grouped under one general heading. For small 
factories such an elaborate system of classification is 
not warranted, but where manufacturing is done on an 
extensive scale even a more detailed analysis may be 
necessary. The object here has been to show the pos- 
sible ramifications of rent expense in its broader ap- 
plications. 

Referring back to the original summary of rent ex- 
pense at the beginning of this chapter, we found that 
this amounted to $54,363.20 for 105,913 square feet of 
floor space, with an equivalent rate of $0.5133 per 
square foot. This space must now be classified so that 
an amount proportionate to the floor space occupied 
can be charged to each division of manufacturing ex- 
pense, such as administration, power, machine expense, 
etc., and in this way be eventually closed out into either 
machine or material expense. A classification of floor 
space by expense classification follows : 

Items chargeable to machine and tool expense: 

Includes space in manufacturing departments occupied 
by machines and benches, and the surrounding space, in- 
cluding private aisles necessary for their proper operation 
and maintenance. This space should be accounted for as 



RENT EXPENSE 75 

a balance after all other areas have been deducted from 
the total area of each department. It should be finally dis- 
tributed amongst the various benches and machines for 
use in determining a machine rate of expense loading, as 
will be explained in detail in Chapter VII. Includes, also, 
tool rooms. 
Items chargeable to administration expense: 

General shop administrative and clerical offices (all 
offices included under shop administration expense); 
manufacturing offices of general foreman, foreman and 
shop clerks ; space occupied by lockers. 
Items chargeable to material expense: 

Offices where the work done pertains to material; stock 
rooms, including private aisles; raw and process stock 
space outside of stock rooms; tracks and space occupied by 
scales (pertaining to material); freight elevator space; 
three-fourths of main aisles in the manufacturing and stock 
departments; receiving rooms; inspection laboratories. 
Items chargeable to power expense: 

Steam generating system, including space occupied by 
boiler room, coal bunkers, ash bins, ash conveyors, etc.; 
electric generating system, space occupied by generators, 
switchboards, etc.; electric distributing system, space 
occupied by mains, etc. ; transmission system, space occu- 
pied by motors, shafting, switchboard, etc., other than 
transmission stock; compressed air system, space occupied 
by compressors and piping. 
Items chargeable to light expense: 

All space taken up by lighting systems. 
Items chargeable to rent expense : 

Stairways and passenger elevators; one-fourth of main 
aisles in the manufacturing and stock departments and all 
of the office corridors; sinks and toilet rooms; vacant space 
in shop not in use. 

This classification of floor space forms the basis for 
prorating and distributing rent expense to the several 
other divisions of manufacturing expense heretofore 
mentioned. These areas should be checked up at peri- 
odic intervals, as extensive changes or removals will 
affect costs of production either through excessive or 
insufficient charges. Office space should be charged a 



76 SHOP EXPENSE ANALYSIS 

somewhat higher rate per square foot than regular 
space. This can be determined by an analysis of ex- 
penses and will be found to average closely to a ratio 
of two to three; that is, if regular space costs fifty 
cents per square foot, office space would be found to 
average close to seventy-five cents; the higher cost is 
due to more effort being expended in the cleaning and 
maintenance of the office space. 

The purpose which the writer has had in mind in 
making the foregoing analysis of the annual rent 
charge has been to show the relative importance and 
the extensions of one of the most important divisions 
of manufacturing expense; one in fact which has not 
been treated seriously enough by both manufacturers 
and accountants alike, that is, from a cost standpoint. 
The illustrations used herein are not intended for use 
either in very small or exceptionally large plants ; they 
must be changed to fit existing conditions at the plant 
where they are to be used. In trying to strike a happy 
medium and at the same time show some of the pos- 
sible ramifications the purpose has been, therefore, to 
provide a basis of reasoning rather than to establish 
certain fixed rules or lines of procedure to be followed. 

In our analysis of manufacturing expense we have 
considered, thus far, administration expense, power 
expense, and rent expense. In the next chapter an 
analysis will be made of depreciation, insurance, taxes, 
and interest charges. As these constitute a very im- 
portant part of the total overhead which we are in- 
'terested in assessing against costs of production an 
analysis of certain common errors made in computing 
these charges will be discussed and a standard method 
of determining what they are wiU be outlined. 



Chapter VI 

DEPRECIATION, INSURANCE, TAXES, AND IN- 
TEREST—TOOL, MATERIAL, AND SPECIAL 
DEPARTMENT EXPENSE 

IN our preceding' analysis of administration, power, 
and rent expense we found that these divisions of 
expense were distributable to costs of production on 
the basis of employees, units of power consumed, and 
floor space occupied, respectively. 

Under the classification ''fixed charges" were in- 
cluded depreciation, insurance, and taxes. These 
charges are computed and distributed to production 
centers on the basis of face values, which, as will be 
noted by the reader, forms a basis distinct from any 
thus far considered. The importance of correctly 
classifying additions to the factory plant accounts, on 
which point the writer laid considerable stress in an 
earlier chapter, will now be fully appreciated; as it 
will be seen that the face values of the factory equip- 
ment, as indicated by the respective plant accounts on 
the general ledger of the company, control the extent 
of the expense charges for which they are used as a 
basis of computation. 

Of the three divisions under the head of fixed 
charges, depreciation is by far the most important from 
a cost standpoiat. Until such time as a standard 

77 



78 SHOP EXPENSE ANALYSIS 

method of computing depreciation has been established 
and adopted, this important part of manufacturing ex- 
pense will continue to perplex and confound manufac- 
turers and accountants probably more than all the 
other phases of cost accounting combined. 

Some manufacturers set aside reserves for depre- 
ciation, according to fixed rules, while others set them 
aside according to the state of their digestion. (This 
latter statement is far from idle jest. A board of direc- 
tors, with which the writer had occasion to be thrown 
in contact several years ago, set aside each year a 
reserve for ''depreciation" which was later charged 
against the manufacturing branch of the company and 
assimilated in their cost of production. The amount 
varied in proportion to the profits of the company for 
the preceding year, and, to a great extent, on the state 
of mind of the officials at the time of these annual 
meetings. The idea that depreciation formed a most 
vital part of their cost of manufacture had not en- 
tered the minds of these men, and yet they expected to 
use their shop costs as a basis for determining sell- 
ing prices.) 

The determination of depreciation rates is mostly 
a matter of estimate. Any scheme of depreciation 
must therefore be necessarily founded on an estimate 
of the life of the plant under consideration. Deprecia- 
tion must represent to the manufacturer the difference 
between the cost of the property and its liquidation 
value when it becomes useless to him. This period of 
usefulness is governed by two factors, actual wear 
and tear, and possible obsolescence due to improve- 
ment in the art. No one would advocate writing off 
the same amount of depreciation on a flying machine 
motor as on a motor in ordinary commercial appli- 



FIXED CHARGES 79 

cation, for the simple reason that the rapid improve- 
ment in the design and construction of motors for 
driving aircraft has made it necessary to discard for- 
mer types long before they have become worn out 
through actual usage. Certain types of automatic screw 
machines having a natural life of between fifteen and 
twenty years were replaced in a plant known to the 
writer at the end of three years by machines so much 
more efficient that the loss incurred in discarding 
the earlier machines was more than made up through 
the operation of the improved type. Types of build- 
ings for certain classes of manufacturing have also 
been known to change, although not so rapidly as in 
the case of machines and fixtures. Obsolescence is 
therefore a very important factor from a depreciation 
standpoint, and one which must be given careful con- 
sideration when establishing rates. 

Since depreciation is so dependent on variable fac- 
tors, is so much a matter of estimate and even conjec- 
ture, the question has naturally been raised, "Why 
not set aside each year a sum which will be adequate to 
meet all needs and in this way eliminate all fussing 
with depreciation, amounts, and rates ! ' ' This scheme 
would be perfectly logical were it not for the fact that 
it does not take into consideration the effect on operat- 
ing costs. 

Depreciation is a very real expense just as much as 
power, rent, and taxes; and every administrative 
head should understand that it is something more than 
simply a bookkeeping transaction. When we stop to 
consider that in the average machine shop the charge 
to manufacturing expense for depreciation on build- 
ings, machinery, and tools, when computed at fair 
rates, averages about one-third of the manufacturing 



80 SHOP EXPENSE ANALYSIS 

expense, an idea of its effect on shop costs will be 
more readily appreciated. 

A factory and its equipment represent a complex en- 
tity made up of units varying in degree of importance 
from a file to a building. The file is soon destroyed, 
while the building may last for generations, but in the 
final analysis they are both perishable tools. Between 
these extremes lies, therefore, a continuous line of 
equipment, each item of which contributes with its 
own life to the product of the factory. Three factors 
govern any depreciation scheme : 

First — The length of time the property is to be used ; 

Second — The liquidation value at the end of that 
period ; 

Third — The method of creating a reserve to take 
care of this depreciation, that is, whether uniform or 
varying amounts shall be set aside annually. 

It is obvious that the several estimates which have 
to be made and used as the basis of any depreciation 
scheme must naturally be based on a combination of 
experience and conjecture. It is a lamentable fact that 
more data on depreciation of properties are not avail- 
able for standardization purposes, as they would be 
of material assistance in establishing rates. However, 
the fact remains that any scheme relying on estimates 
for its success will rarely, if ever, turn out to be abso- 
lutely correct. We must, therefore, make use of what 
data are available and apply them in a reasonable 
way to the problems under cpnsideration. Deprecia- 
tion is too often looked upon as a loss ; yet one of the 
first laws of economics teaches us that "production 
without consumption cannot exist"; hence, ** deprecia- 
tion of the plant" means to a reasonable extent ''ap- 
preciation of the product. * * 



FIXED CHABGES 81 

Considering the three factors of any depreciation 
scheme, in the order above stated, the first is that of 
''time.'* 

1. The ''life" of any property from an operating 
standpoint is, as has been stated, dependent on wear 
and tear, and on obsolescence. In some instances wear 
and tear may be entirely offset by repairs and replace- 
ment of parts, as found in the case of railroads. In 
manufacturing establishments, however, the procedure 
is usually to make repairs as they are needed, but to 
make no regular and extensive replacement of parts. 

2. The "liquidation value" of a plant is affected to 
a large extent by its adaptability for other uses and 
by* its possible increment, as in the case of city proper- 
ties. At best, however, the liquidation value of the 
average plant at the end of its useful life is little more 
than scrap value, and in its worst phase it sometimes 
involves considerable expense in order to get rid of 
worthless property. 

3. The "method" of computing depreciation de- 
rives its importance from its possible effect on operat- 
ing costs. It is sound business practice to approach 
liquidation value as rapidly as possible ; it is also good 
policy to know the real value of property when mak- 
ing up tax reports or when placing insurance; but it 
is vitally important that the effect on costs of produc- 
tion resulting from any depreciation reserve scheme 
requires that the method adopted be determined with 
due regard to its effect on these costs. 

The argument in favor of writing off depreciation 
on the basis of diminishing rather than original values 
is well taken, for the reason that during the early life 
of a property, when the reserve for depreciation would 
be high by this method, the repairs would be negligible ; 



82 SHOP EXPENSE ANALYSIS 

while during the later period of its usefulness the 
smaller reserve would be offset by higher repair 
charges. Therefore, by applying rates of depreciation 
on net values of plant and thereby making the charge 
to expense lighter towards the end of the life of the 
property, the effect on operating costs would be more 
or less equalized for all periods. It is generally true 
that the efficiency of a plant decreases as the plant 
grows older, and it would seem reasonable to have the 
depreciation charge to manufacturing expense less 
when repairs are increasing. 

Some plants have adopted what is known as the "de- 
preciation-repair reserve" method, which consists of 
estimating the probable life of property and the re- 
pairs for that period. By adding these repairs to the 
amount for depreciation and by dividing this total by 
the estimated number of years a flat charge is made 
to manufacturing expense each year to cover all re- 
pairs and depreciation. Any increase or decrease for 
that period is adjusted through a special adjustment 
account provided for that purpose. This method has 
some good points in its favor, but does not really sim- 
plify matters as much as it would seem to on first con- 
sideration, because of the constant adjustments which 
would have to be made for new equipment purchases 
and for equipment sold or junked. 

The English practice in arriving at depreciation 
rates on buildings is to consider the value of a build- 
ing to be always worth at least twenty-five per cent of 
its original cost. This procedure is not in accord with 
the usual practice of American manufacturers and en- 
gineers, who take an entirely different viewpoint. In 
England, where many of the buildings are over a hun- 
dred years old, a building is considered as something 



FIXED CHARGES 83 

permanent, even if it only consists of walls, roof, and 
floors, so long as the floors can carry a load. The rates 
of depreciation on buildings which they use average 
only about one-half of one per cent. That buildings 
are sometimes too permanent does not seem to enter 
into their method of calculation. By charging too low 
a rate for depreciation, and by paying out profits ac- 
cording to the state of their accounts, English manu- 
facturers often find it necessary to take in new capital 
in order to bring their equipment up to modern re- 
quirements. That this usually results in hardship will 
be readily appreciated, and the English practice has 
been justly criticized for it. 

A very good illustration of the fact that construc- 
tion can at times be too permanent can be found in 
the case of an English railroad between London and 
Liverpool which was built many years ago and was laid 
out with the intention of using only small freight cars 
with a ten-ton capacity limit. Owing to the fact that 
all cuts, tunnels, bridges, etc., were made practically 
permanent by using masonry and stone construction 
throughout, the cost of rebuilding the road later on was 
so great as to make it prohibitive. Today freight 
rates on merchandise between these two cities, a dis- 
tance of approximately two hundred miles, are nearly 
twice those charged between New York and Chicago, a 
distance of almost one thousand miles. This condition 
is directly due to the fact that sufl&cient depreciation 
had not been provided for a possible condition such as 
now exists. 

In American practice the following rates of deprecia- 
tion on buildings and permanent fixtures devoted to 
manufacturing purposes have been used with a con- 
siderable degree of success : 



84 



SHOP EXPENSE ANALYSIS 



Depreciation Rates on Buildings and Permanent Fixtures 



Factories Warehouses 



Buildings: 

Modern fireproof steel and tile . 

Mill construction 

Steel construction (only partly 

fireproof) 

Wooden buildings (of poor 
construction) 

Permanent Fixtures: 

Pertaining to buildings 

Pertaining to power and light- 
ing plants 

Pertaining to material 



3 per 

7 " 


cent 

u 


3 
4 


per cent 

u u 


6 " 


u 


3 


a u 


12 " 


u 


8 


u u 



12 

12 

12 



8 " " 

Q U U 



The reason for using a lower rate of depreciation 
on warehouses is due to the conjecture that the wear 
and tear on factory buildings and permanent fixtures 
resulting from the constant jar of machinery will be 
greater than on buildings used only for storage pur- 
poses. ''Permanent fixtures pertaining to power and 
lighting plants" are depreciated at a slightly higher 
rate than other permanent fixtures, on the basis that 
they come more or less in the same class as machinery 
and are therefore subject to more rapid obsolescence 
than other permanent fixtures. 

In establishing rates of depreciation on machinery 
it is very seldom worth the extra trouble involved to 
use separate rates for each machine type. A uniform 
rate for all types will prove to be of much more prac- 
tical value both in the simplicity of its application 
and in attaining the ends desired. A rate of from 7 
per cent to 10 per cent on machinery is usually within 



FIXED CHABGES 85 

reason, and rates approximating these are what are 
commonly used. Small tools should be written off just 
as rapidly as possible. Many manufactories write all 
tools off as soon as purchased, but as this would prove 
to be a hardship to new companies, a minimum of at 
least 15 per cent a year should be written off to be 
conservative. In the case of patterns, changes are 
even more likely to be made than in the case of tools ; 
it is good practice to write them off entirely within two 
or three years. 

When making ledger entries for depreciation re- 
serves an account called ''depreciation reserve" should 
be credited and the manufacturing (shop) expense ac- 
count debited. In this way the original values of 
the respective plant accounts will remain unchanged. 
When any part of the plant or equipment is sold or 
junked manufacturing expense is debited with the loss 
incurred. 

The form of depreciation report on page 86 will show 
clearly what amounts have been set aside and how they 
compare in percentage form with the original values. 

Insurance and tax charges to manufacturing ex- 
pense do not require much analysis. Insurable values 
are determined from an analysis of the plant accounts, 
deductions being made for such parts of the plant as 
foundations, piping, etc., on which no insurance is 
found warranted. 

Some companies are carrying self-insurance on iso- 
lated risks where values do not exceed a few thousand 
dollars in each case. The plan is based on the assump- 
tion that where a sufficient number of such small units 
exist, the aggregate premiums will more than pay for 
the losses involved. In this way a fund is built up 
which will eventually be large enough so that the in- 



86 



SHOP EXPENSE ANALYSIS 






u- 






fc; S aJ 03 1^ 

CD 2 S ai_ 






'go 



<5 



C3 OQ 

Pip 






PS 






fl C OJ 

•^ o 



a 
<i1 






O PP P-l (^ CC Ph CC 



o3 : 



FIXED CHAKQES 87 

come therefrom will be sufficient to pay the yearly 
expense and losses. The building up of such a fund 
would naturally require a considerable time, as fires 
would probably be inevitable and would tend towards 
retarding this building-up process. However, if the 
risks are carefully selected and the proper precau- 
tions used in preventing fires, a fund of this sort would 
finally grow to considerable proportions and dividends 
could probably be derived therefrom. 

The important element of any such scheme of self- 
insurance is to run no chance of big losses and to 
keep as small as possible such losses which are bound 
to come, by keeping the risks isolated. 

Having thus considered the three divisions of ''fixed 
charges," depreciation, insurance and taxes respec- 
tively, the question of including interest on the fac- 
tory equipment as a charge to manufacturing expense 
is worthy of careful analysis and consideration. 

Those accountants, including many prominent in the 
profession, who advocate charging to manufacturing 
expense, and thereby to costs of production, the inter- 
est on the investment in a factory's equipment as rep- 
resented by the plant accounts on the general ledger, 
are subject to criticism because of the fact that they 
should have gone much further with their interest 
charge or should have discarded it entirely. By again 
referring to our study of economics we find that a 
machine represents labor in condensed form; there- 
fore, labor and machinery are synonymous from a 
production viewpoint. What right have we, then, to 
charge interest on the investment in the machine equip- 
ment and not charge it on the investment in labor? 
A cost of production is made up of labor, material, 
and expense ; then why not also charge interest on the 



88 SHOP EXPENSE ANALYSIS 

investment in materials and on the investment used 
up by shop expense? 

A manufacturer has three operatives performing 
certain work each day. He installs an automatic ma- 
chine which eliminates all three of them. Instead of 
the former labor being charged against the job, the 
cost of upkeep and depreciation on the machine is 
charged in place thereof. Why accountants do not 
advocate charging interest on the labor cost and yet 
believe it justifiable to charge interest on the invest- 
ment in the machine none of those to whom this as- 
pect of the case has been presented have as yet been 
able to explain. The writer does not know of a single 
case on record where ''interest,'^ when included in 
costs of production, has met this objection by also 
including interest on all working capital. 

The contention of the writer is that ''interest" does 
not form a part of the direct cost of manufacture, but 
is chargeable to "profit and loss" as a financial ex- 
pense. There remains, however, considerable room 
for discussion as to whether it is more justifiable to 
charge interest, when based on all working capital 
employed in production, to manufacturing rather than 
to financial expense; but there is certainly no excuse 
for including interest on only the investment in the 
plant to the exclusion of interest on other working 
capital, such as is employed in labor, etc. 

The segregation of "fixed charges" does not in- 
volve any complex system of accounting other than 
the establishment of a fixed policy. The aggregate of 
these charges for depreciation, insurance, and taxes 
does, however, form a large bulk of the total manufac- 
turing expense which we are interested in distributing 
to costs of production; hence, no policy which so 



fIXED CHARGES 89 

vitally affects costs should be adopted without care- 
ful analysis and knowledge both as to the present and 
future policy of the company. 

After the ** fixed charges" have been summarized 
for any period, transfers must then be made to the 
several divisions of expense on the basis of valua- 
tions, which were discussed under the subject of de- 
preciation. This transfer is similar to the ''service 
charge transfers" made from former expense divi- 
sions. In this way these rent charges are finally in- 
corporated in the cost of power, rent, tool expense, 
etc., and then through the distribution of these di- 
visions of ''overhead" finally get into the shop cost 
summary. 

"Tool expense" may be defined as consisting of 
that portion of manufacturing expense incidental to 
the operation of the machine and tool equipment of the 
factory. The following specimen classification refer- 
ence list will convey a general idea as to the expenses 
which are chargeable under this division of manufac- 
turing expense: 

TOOL EXPENSE 
CLASSIFICATION REFERENCE LIST 

401 Belting for machines 

402 Changes to small tool and to shop fixtures in tool stock- 
rooms 

403 Changes to machinery 

404 Depreciation on machinery, tools, and shop fixtures. 
Transferred from "Fixed Charges" 

405 Insurance on machinery, tools, and shop fixtures. Trans- 
ferred from ''Fixed Charges" 

406 Taxes on machinery, tools, and shop fixtures. Trans- 
ferred from "fixed charges" 

407 Repairs to machinery 

408 Repairs to tools 

409 Repairs to patterns 

410 Salaries, clerks in tool stockrooms 



90 SHOP EXPENSE ANALYSIS 

411 Salaries, tool inspectors 

412 Salaries, machine oilers 

413 Salaries, men setting up machines for operators 

414 Salaries, setting up new machines 

415 Stationery 

416 Supplies (waste, oils, lubricants, etc.) 

417 Water (other than for power or rent expense) 

418 Service charges (Brought forward from administration, 
power, rent, etc.) 

419 Transfers to other accounts 

''Material expense" may be defined as all expense 
incurred in purchasing, receiving, inspecting, handling, 
and storing all shop raw and worked materials. It is 
often of benefit to divide material expense as raw and 
worked material expense respectively, as in this way 
a somewhat better control can be exercised over the 
various kinds of expense involved. 

A considerable portion of material expense is that 
incurred through inspection. It might be well, there- 
fore, to draw attention to the fact that one of the most 
common causes of waste is that traceable to faulty 
inspection. The most efficient form of inspection is 
possible where this work is done under the direction 
of a chief inspector whose sub-inspectors report di- 
rectly to him instead of to department foremen. Un- 
less this plan is followed, the inspector will, in the 
majority of cases, be biased in favor of the depart- 
ment to whose head he reports. 

Material inspection may be divided into three parts 
— raw material inspection, worked material inspection, 
and finished material inspection; the two latter com- 
ing under the head of "worked material expense," as 
will be seen from the classification list below. Proper 
inspection in a manufacturing organization can do 
much towards curtailing manufacturing expense by 
detecting mistakes before useless extra labor is con- 



FIXED CHABGfES 91 

sumed on defective parts. It is a branch of the mann- 
factnring organization whose head should be a man 
versed in engineering practice and standards, under- 
standing thoroughly the use of testing machines and 
gages, and having a working knowledge of the chem- 
istry of metals. The following classifications show 
the nature of the items composing both raw and 
worked material expense: 

RAW MATERIAL EXPENSE 
CLASSIFICATION REFERENCE LIST 

501 Changes to patterns and to shop fixtures in raw material 
stockrooms 

502 Changes to permanent fixtures pertaining to material 

503 Depreciation on raw material, fixtures, etc. 

504 Changes 

505 Insurance on raw material, fixtures, etc. 

506 Taxes on raw material, fixtures, etc. 

507 Repairs 

508 Salaries, clerks on raw material 

509 Salaries, receiving department 

510 Salaries, inspectors of raw material 

511 Salaries, raw material stock keepers 

512 Salaries, freight elevator operators (part) 

513 Salaries, raw material porters 

514 Stationery 

515 Unclassified raw material expense 

516 Testing expense (including laboratory work, etc.) 

517 Service charges (Brought forward from administration, 
power, rent, etc.) 

WORKED MATERIAL EXPENSE 

551 Changes to shop fixtures in worked and finished material 
stockrooms 

552 Changes to permanent fixtures, worked material, etc. 

553 Depreciation on permanent fixtures, worked material, etc. 

554 Insurance on investment in process material and on fix- 
tures 

555 Taxes on investment in process material and on fixtures 

556 R-ailway expense (where sidings, etc., are used) 

557 Repairs to shop fixtures in worked and finished material 
stockrooms 



92 



SHOP EXPENSE AN-ALYSIS 



558 

559 

560 
561 
562 
563 
564 
565 

566 

567 
568 
569 



Repairs to shop and permanent fixtures in worked and 
finished material stockrooms 

Salaries, clerks on worked and finished material stock- 
records 

Salaries, stock keepers 

Salaries, porters on worked and finished material 
Salaries, cranemen 
Salaries, counters 

Salaries, inspectors of worked and finished material 
Salaries, freight elevator operators (part of total charge- 
able to worked material) 
Stationery 

Unclassified worked material expense 
Wrapping paper, cartons, boxes, etc. 
Service charges (Brought forward from administration, 
power, rent, etc.) 



As we are interested in closing out all manufactur- 
ing expense finally into either machine expense or ma- 
terial expense, it naturally follows that the balances to 
both raw and worked material expense wiU be closed 
out into material expense and will be applied to shop 
costs as a loading distinct from the machine expense 
loading. The component charges to these two main 
divisions of manufacturing expense can be analyzed 
at a glance from the following : 



Manufacturing Expense 


Machine 
Expense 


Material 
Expense 


Administration Expense 


part 
part 
part 
part 
all 
none 


part 
part 
part 
part 
none 
aU 


Power " 


Rent " 


Fixed Charges " 


Tool " 


Raw and Worked Material Expense . 



It very often occurs that certain so-called ''special 
departments" use expense supplies and materials of 



FIXED CHARGES 93 

such a nature that they form practically the bulk of 
the manufacturing expense chargeable against such de- 
partments. This is especially true in such instances 
as brass and iron foundries, dipping and plating de- 
partments, and enamelling, lacquering, painting, and 
finishing departments. The nature of the expense in 
such cases is usually so specific that separate expense 
loadings are used for these departments to the exclu- 
sion of the general machine expense loading. In other 
words, these special departments are treated as though 
they were single producing units rather than a col- 
lection of units as found in the general shop. The 
segregation of such departments should only be made, 
however, when the nature of the work done by them 
is very specific. 

We have now analyzed all of the elements of manu- 
facturing expense and are now ready to take up the 
question of distribution to production costs. The main 
part of this expense, as we have found, is that known 
as ''machine expense." In the following chapter the 
distribution of this expense through what is known as 
the ''machine unit system" wiU be discussed in detail. 



Chapter VII 

THE MACHINE UNIT SYSTEM 

ri^HE distribution of the machine expense portion of 
-'■ manufacturing expense by means of an hourly 
rate of expense loading chargeable against the various 
productive machines and benches comprising a shop, 
is known as the Machine Unit System. It is accom- 
plished by dividing and sub-dividing the normal yearly 
machine expense by means of analysis and estimate 
until all of this expense has been assessed directly 
against the various productive units. This unit ex- 
pense is then reduced to a rate per machine hour by 
dividing it by the estimated number of hours of opera- 
tion per year for each machine. 

The machine unit system of expense distribution 
varies from the commonly used "percentage of labor 
method" in that it distinguishes between the costs of 
operating the various machine types, and establishes a 
relation between the output of each machine unit and 
its operating cost. The fault found with the machine 
unit method is that it is based too largely on esti- 
mate, and that it depends on what is known as a 
* ' supplementary rate ' ' to make it check with the actual 
manufacturing expense for any period. Whether or 
not this criticism is justifiable, and if so what changes 
must be made to remedy these faults, will be discussed 

94 



MACHINE UNIT SYSTEM 95 

in the next chapter. However, in order to understand 
more fully what this criticism is based on, let us first 
consider the machine unit system in its present form. 

The first step in connection with the installation of 
this system consists of determining the normal ma- 
chine expense which is to be distributed. This is de- 
rived from a study of the various divisions of manu- 
facturing expense for past years, such as administra- 
tion, power, rent, fixed charges, tool expense, etc., as 
analyzed in preceding chapters. The term "normal," 
as here used, may be defined as the amount of ex- 
pense which past experience and present knowledge of 
future conditions would warrant as being applicable 
under normal shop activity. This normal expense 
should be neither high nor low, but a safe basis on 
which costs can be computed. This will bring forcibly 
to mind the futility of trying to apply machine rates 
in plants where manufacturing expense charges have 
been kept in a haphazard manner. Accurate records 
of past performances are absolutely necessary, and 
the machine rate should not be attempted until suffi- 
cient reliable data are available to furnish a basis of es- 
timate. A study of the manufacturing expense should 
be made at least once a year and revisions made when 
found warranted. Changes in prices of expense ma- 
terials and supplies, or changes in the wages paid to 
expense labor, such as millwrights, men setting up ma- 
chines, etc., directly affect the normal expense and 
must therefore be carefully analyzed with regard to 
their influence on normal figures. 

The second step comprises the standardization of 
the various machine types by classification, according 
to arbitrary standards. For example, in a plant known 
to the writer where the machine unit system is in oper- 



96 SHOP EXPENSE ANALYSIS 

ation, the productive machine classifications were 
standardized as follows: 

Lathes 

Screw machines and miscellaneous lathe types 

Milling machines 

Drill presses 

Grinders 

Buffers and polishers 

Tappers 

Punch presses 

Shears 

Metal planers 

Hammers 

Metal saws 

Sheet metal rollers and formers 

Furnaces, forges, and annealing machines 

Anvils and surface plates 

Jointers and planers 

Molders and shapers 

Sanders 

Wood saws 

Mortising and tenoning machines 

Bench work 

Each tj'^pe of productive machine is sub-divided ac- 
cording to its functions. For example, lathes were 
sub-classified as follows: 

Lathes: 
Turret 
Engine 

Tool makers and precision 
Rapid reduction 
Hand and speed 
Wood turning 
Backing off 
Gear cutting 
Gas engine 

A detail classification of each machine type is then 
made according to capacity, as follows : 



MACHINE UNIT SYSTEM 



97 



Turret Lathes 


Size of Stock, in inches 


Swing, 
in inches 


Length of 
Bed, in feet 


Classification 


3^by lOtol^by 10.. 
l^by 8 to 23^ by 12.. 
(Heavy Type) 2 by 24. . 
( « " ) 3by36.. 
( « « ) 12by40.. 


10 to 14 

15 to 18 

12 to 16 

19^ 

21 


4 to 7 
7 to 10 

8 

9 

9 


LA 
LB 
LC 
LD 
LE 



In order to make possible a detailed classification of 
machines similar to that above, each machine should 
be assigned a number as soon as installed, and a plate 
bearing this number should be affixed permanently to 
some conspicuous part of the machine so that it may 
be easily distinguishable. A card should then be made 
out showing the machine number, manufacturer's 
name, type number, size, date purchased, purchase 
price, location, etc., together with the classification let- 
ters for that type of machine. These classification let- 
ters should then be stamped on a separate plate from 
that used to designate the machine number and affixed 
to the machine in the same manner. The advisability 
of using separate plates for the classification and num- 
ber will be found when changes to the classification 
plates are necessitated owing to errors made in assign- 
ing these classifications. By this method the classifi- 
cation plate can be detached without disturbing the 
number plate, and in this way the confusion result- 
ing from the simultaneous removal of a number of 
plates bearing the numbers of different machines is 
eliminated. 

The machine equipment may be arbitrarily divided 



98 SHOP EXPENSE ANALYSIS 

into two distinct classes: Standard type machines, 
and miscellaneous type machines, respectively. In the 
former class would be included all such standard ma- 
chine tools as lathes, punch presses, milling machines, 
drill presses, etc. ; while the latter class would include 
such equipment as ovens and furnaces, tanks, kettles, 
pots, vats, motors driving standard type machines, 
testing apparatus, etc. As defined in Chapter III, mis- 
cellaneous machinery includes those non-portable fix- 
tures which are used in direct production and which 
are assessable, therefore, against the work which is 
performed, either directly or on a pro-rata basis. 

From a production analysis, the machine equipment 
consists of four parts : Productive machines, non-pro- 
ductive machines, productive benches, and non-produc- 
tive benches. 

A "productive machine" may be defined as a ma- 
chine used by a workman in actual manufacturing and 
against which time is turned in for work done at it. 

A ' ' non-productive machine " is an auxiliary used in 
connection with a productive machine. It includes such 
equipment as water-tool grinders, etc., whose time of 
operation is not reported against jobs on time tickets. 

A "productive bench" is a bench, or even floor 
space, used by a workman in actual manufacturing and 
against which time is turned in for work done at it. 

A "non-productive bench" is one used as an aux- 
iliary to a machine, as, for example, a bench used for 
holding tools or work, or for small operations in con- 
nection with the machine where all the time is turned 
in against it. 

Having thus established a distinction between the 
productive and non-productive units, the next step is 
that of distributing the normal manufacturing expense 



MACHINE UNIT SYSTEM 99 

to production centers. This expense must be analyzed 
and segregated; first, by the general divisions of the 
manufacturing organization ; then by departments, and 
finally by productive units. Going back, therefore, 
to the manufacturing expense, which has been under 
consideration in preceding chapters, we find this to 
have been divided as follows: 



MANUFACTURING EXPENSE 



Administration and clerical $49,419.90 

Power 22,632.30 

Rent 54,363.20 

Tool 156,402.05 

Fixed Charges: 

Depreciation $87,943. 18 

Insurance 359 . 31 

Taxes 1,054.74 $89,357.23 

Material 35,128.07 

Unclassified 1,209.71 

Idle Labor 16,487.54 



Grand Total Manufacturing Expense $425,000.00 



The above expense items represent practically only 
the direct charges as made during the year, and will 
be affected somewhat by transfers which have to be 
made, first, between these divisions of expense for 
service and then to machine and material expense, re- 
spectively. The table on page 100 shows how these 
charges would appear if apportioned on the basis of 
their analysis in former chapters. 

An inspection of these figures will show that the 
amount of manufacturing expense chargeable to ma- 
chine expense is $345,278.72, leaving a balance of 



100 



SHOP EXPENSE ANALYSIS 



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MACHINE UNIT SYSTEM 101 

$57,210.45 to be assessed as a material expense loading 
against production costs. This machine expense, as 
shown above, is made up of various kinds of expense, 
each of which must now be distributed to production 
centers according to different units. For analytical 
purposes let us consider the expense figures used here- 
with as representing the manufacturing expense which 
has been obtained, as '* normal." This expense to- 
gether with the units and rates of distribution would 
then be as shown on the following pages. 

Having assembled the machine expense by classifi- 
cations, rates, and units of distribution, we are ready 
to consider each kind of expense more in detail: 

Administbation. Administration expense may be 
arbitrarily divided into two parts, {a) ''general shop 
administration" and (b) "departmental administra- 
tion" expense respectively. 

( a ) The ' ' general ' ' administration expense is made 
up of the administration and clerical expenses of the 
shop organization which cannot be assessed directly 
against any of the manufacturing departments. It in- 
cludes salaries of the shop superintendent and his as- 
sistants, salaries of employment, cost, and payroll de- 
partments, traveling expenses of shop executives, etc. 

(b) The "departmental" administration expense 
is more or less self-explanatory, as it consists of the 
salaries of departmental foremen, foremen's clerks, 
and any other administration expense which can be as- 
sessed against specific manufacturing departments. 

Administration expense is distributable on the basis 
of productive man hours, determined by multiplying 
the average number of productive employees by the 
normal yearly working hours per employee. On an 
average of fifty hours per week, these hours would 



102 



SHOP EXPENSE ANALYSIS 





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104 SHOP EXPENSE ANALYSIS 

equal 2,600 per man per year. It will be seen, there- 
fore, that the ''general" administration rate will be 
the same per man hour for all departments, while the 
''departmental" rate will vary according to the ad- 
ministration expense of each separate department. As- 
suming, therefore, that on analysis the administration 
expense of $50,967.39, which we have used, is divided 
in a ratio of one-third to "general" and two-thirds to 
' ' departmental, ' ' the expense figures would be : 

General shop administration expense $16,989 . 13 

Departmental administration expense 33,978.26 

Total , $50,967.39 

Reducing the "general" administration expense to 
a rate per man, by dividing it by the number of pro- 
ductive employees (1,000) and then further reducing 
this rate ($16.99) to a rate per man hour by dividing 
it by the normal hours per year (2,600), this rate is 
found to be $0.0065 per man hour. The "departmen- 
tal" expense of $33,978.26 is made up of a total of 
different departments' administration expenses, and 
must be distributed by dividing each department's ad- 
ministration expense by its productive man hours : 



Department 


Number 

of 
Employes 


Departmental 

Administration 

Expense 


Productive 
Man 
Hours 


Rate per 
Man 
Hour 


A 
B 
C 
D 


100 
200 
300 
400 


$ 4,000.00 

7,000.00 

9,000.00 

13,978.26 


260,000 

520,000 

780,000 

1,040,000 


$0.0154 
0.0135 
0.0115 
0.0135 


Total 


1,000 


$33,978.26 


2,600,000 


$0.0131 ^ 



* Not used. 



MACHINE UNIT SYSTEM 



105 



Adding the '* general" administration rate to the 
rate of each department, the total rate per man hour 
for the respective departments would then be: 



Department 


Departmental 
Rate 


General Rate 


Final Administration 

Rate per Productive 

Man Hour 


A 
B 
C 
D 


$0.0154 
0.0135 
0.0115 
0.0135 


$0.0065 
0.0065 
0.0065 
0.0065 


$0.0219 
0.0200 
0.0180 
0.0200 



PowEB. Power expense is distributed in propor- 
tion to the amount of steam, electric current, or com- 
pressed air used by each machine or bench. This dis- ' 
tribution is based on actual tests made on each type 
of machine under working conditions, or on estimates, 
where such tests cannot be made. 

In plants where a considerable part of the machine- 
tool equipment is operated directly by motors, an al- 
lowance should be made in the rate per kilowatt hour 
for power so used as against power sent through the 
general transmission (line shafting) system. This rate 
for direct motor drive would be based on the ''current 
distributing expense" figures, and the regular trans- 
mitted power rate on the transmission expense figures. 
The rate for power transmitted would, therefore, be 
somewhat higher than that for current distributed, due 
to the additional expense of operating the line shafting. 

By referring back to Chapter IV it will be seen that 
the maintenance of this transmission system amounted 
to $3,111.10. If we assume that one-third of the 693,522 
kilowatt hours is distributed directly to machines, and 



106 



SHOP EXPENSE ANALYSIS 





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MACHINE UNIT SYSTEM 107 

two-thirds transmitted througli line shafting, we can 
obtain both the costs and rates per kilowatt hour for 
each method of current conveyance, as follows: The 
total expense for electric current, distributed and 
transmitted, is $16,747.31 (see ''unit analysis" table, 
pages 102 and 103), of which the direct charges to 
transmission expense, as per power expense analysis 
is Chapter IV, are $3,111.10, leaving a net distribut- 
ing expense of $13,636.21 to be closed out, one-third 
($4,545.40) to distributing expense, and two-thirds 
($9,090.81) to transmission expense, a total transmis- 
sion expense of $9,090.81 + $3,111.10, or $12,201.91. 

To find the rates per kilowatt hour for distribution 
and transmission we would proceed as follows: The 
total current is 693,522 kilowatt hours, one-third of 
which, 231,174, is distributed, and two-thirds, 462,348, 
is transmitted; the rate for distributing current is, 
therefore, 4,545.40 ^ 231,174, or $0.0197 per kilowatt 
hour ; and the rate for transmitting current is 12,201.91 
-^- 462,348, or $0.0264 per kilowatt hour. 

Before proceeding to distribute power expense a list 
of all productive and non-productive machines in each 
department should be compiled, showing the class let- 
ters, description of each type of machine, and the num- 
ber of machines covered by the description. A list 
should also be compiled of distinctively different kinds 
of "productive bench work," with a description of the 
general line of work done. Non-productive machines 
should be listed by departments, with a record in each 
case of the number, description, and classification of 
the productive machine or bench against which all of 
the expense of this non-productive machine is charge- 
able. On the page opposite is shown a practical method 
of assembling this information together with the ad- 



t>e8CBIPTION OP MAC>fl«lt> 

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FORM FOR MAKING POWER TEST REPORTS 
108 



MACHINE UNIT SYSTEM 109 

ditional information required with regard to floor 
Bpace, hours of operation, etc. Separate sheets should 
be used for listing productive and non-productive ma- 
chinery. 

Where a number of machines of different types are 
being operated from the same line shafting, the line- 
shaft load should be assessed against the respective 
machines on the line in proportion to their watt-hour 
consumption under operating conditions. The "power 
test report" form, shown on page 108, has been used 
by the writer in making machine power tests, and will 
give a general idea of the method of procedure. 

In this instance the unit tested was a special machine 
geared to and driven by a three-eighths-horsepower 
motor. The test showed a power consumption of 253 
watt hours and, as the machine was direct connected, 
the power expense rate used was that for "current 
distributed" ($0.0197 per kilowatt hour). Assuming 
the yearly hours of operation of this machine to be 
2,000, the power expense chargeable thereto would be 

.0197 

253 X 2000 X = $9.97. 

1000 

One of the objects of making power tests is to estab- 
lish a relation between specific grades of work done on 
different types of machines. Certain rules must there- 
fore be observed in making these tests. For example, 
when making tests on lathes the following information 
is required : First, size of cut taken — 1/16, 3/16, 5/16, 
or 7/16 inches; second, speed of operation — low, me- 
dium, or high. 

General points to be observed on other machines 
are: 



110 SHOP EXPENSE ANALYSIS 

Drill Presses : The cubic inches of metal removed per minute. 

Punch Presses : The revolutions per minute of fly wheel and 
number of strokes. 

Milling Machines: The cubic inches of metal removed and 
the speed. (Where traverse is controlled by hand, a stop watch 
should be used to determine exact time of removing a certain 
number of cubic inches of metal.) 

Shapers and Planers : The cubic inches of metal removed per 
minute. 

Squaring Shears: The square inches of metal sheared per 
minute. 

Tappers : The size of hole tapped and the speed. 

Grinders: The speed and pressure applied by operator. 

Tests made on types of machines other than those 
listed above must be made in each case along specific 
lines governed by the particular type of machine under 
consideration. Stock used in making these tests should 
be similar to that worked on under average manufac- 
turing conditions. The making of these power tests 
should be carried out under the supervision of an elec- 
trical engineer who will see that all connections are 
properly made. Many valuable recording instruments 
are often destroyed through carelessness in connecting 
up ammeters and voltmeters used in making power 
tests, and hence all possible safeguards should be used 
in order to avoid this useless expense. 

Rent Expense. This expense is distributed and as- 
sessed against machines, benches, and erection areas of 
both productive and non-productive classification at a 
uniform rate per square foot according to the space oc- 
cupied. These areas should be carefully measured, 
and should include the projected obstructive area for 
each machine and any additional space necessary for 
its proper operation and maintenance. The total of all 
floor areas so assessed must equal the floor space 
charged to machine expense, any vacant space in manu- 



MACHINE UNIT SYSTEM 111 

facturing departments being divided proportionately 
among all machines, benches, erection areas, etc. The 
proportionate amount for rent expense can then be 
charged to each machine on the basis of these areas at 
the established rate per square foot. (See Eent Ex- 
pense, Chapter V.) 

Tool Expense. This expense is first distributed by 
departments and then, by dividing and sub-dividing it 
by analysis and estimate, it is finally charged against 
the benches and machines in each department of the 
shop. Depreciation of small tools is assessed against 
each department on the basis of face values of the 
small tool account found by analysis. Supplies should 
be similarly distributed to departments on the basis of 
amounts furnished each department and then to ma- 
chines and benches by estimates of quantity used. Sal- 
aries of tool inspectors, tool draughtsmen, and any 
other expenses incidental to tool stock, are distribu- 
table according to services rendered. If information 
pertaining thereto is not available, then this expense 
should be distributed to departments on the basis of 
face values of the machine and tool equipment in each, 
and then by estimate to the machines and benches. 
Any other classifications of tool expense must be an- 
alyzed and distributed until they are finally assessed 
against machines and benches. The distribution sheet 
presented on the following page shows how tool ex- 
pense is so distributed. 

Fixed Chakges. Depreciation, insurance, and tax 
charges are assessed directly against each machine in 
the factory on the basis of face values. In the speci- 
men analysis, pages 102 and 103, the rate used for all 
fixed charges was foimd to be 10 per cent ; therefore 10 



112 



SHOP EXPENSE ANALYSIS 









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MACHINE UNIT SYSTEM 113 

per cent of the face value of each machine must be 
added to cover this expense. 

Idle Labor Expense. The term * * idle labor expense * ' 
as here used should not be construed as meaning idle 
machine hours. It is the cost of the wages of pro- 
ductive employees which have not been charged, for 
some reason or other, to production orders. For ex- 
ample, in a shop where the wages of men classified on 
the pay roll as productive employees might amount to 
$5,000 a month, the cost summary of shop orders made 
at the end of a certain month might show that only 
$4,500 of this amount had been charged to production 
work. The difference of $500 would therefore be 
chargeable to manufacturing expense as ''idle labor 
expense." It is made up, under average manufactur- 
ing conditions, of time lost in reporting to foremen 
or time-clerks between jobs, of waiting for assign- 
ments of new work, of time lost in washing up, or any 
other causes, justifiable or not, which keep the work- 
men away from actual productive work. Strictly classi- 
fied, this expense should be called "non-productive 
labor," but as this is the term applied to expense labor 
such as sweepers, etc., the term "idle labor expense" 
as here used is probably more easily interpreted. For 
some reason or other this expense is usually neglected 
in connection with arriving at normal manufacturing 
expense figures. It should, however, be given as much 
if not more consideration than any other charge to 
manufacturing expense, as it represents a waste trace- 
able directly to the shop organization. The manufac- 
turing branch of a company is not usually responsible 
for the idle machine hours due to slackness in business, 
but it does control and is therefore responsible for 
the factor of "idle labor expense" incurred through 



114 SHOP EXPENSE ANALYSIS 

its own inefficiency. While, on analysis, this expense 
might be shown to be chargeable to certain depart- 
ments of the shop, it would not necessarily follow that 
these departments were the ones responsible. Any of 
the causes which have been cited, with the possible 
exception of time lost in "washing up" or reporting 
to time clerks, might be due to other departments than 
those against which the charges appear ; hence, the dis- 
tribution of this expense by departments should be 
averaged in proportion to the productive labor, and 
then charged to the machines on the basis of normal 
hours of operation. 

Unclassified Expense. This is assessable on the 
basis of the proportion of manufacturing expense 
charged against each department and machine. Engi- 
neering and drafting expense, as here considered and 
as amplified in the foot note under the table. Unit An- 
alysis of Normal Machine Expense, is assessable to^ 
production centers on the basis of the tool expense 
charges. 

Having established a basis of distribution for all 
of the expense classifications comprising "machine ex- 
pense," these charges must now be assembled in order 
to arrive at a rate per hour of operation for each 
machine class. It will be remembered that all expense 
distributed has been assessed against both productive 
and non-productive machines alike. In this way the 
cost of operating non-productive machines is kept dis- 
tinct from the cost of operating the productive units. 
The non-productive machine expense is charged, how- 
ever, as one item to the productive machines or to those 
machines for whose benefit it is incurred. The follow- 
ing form shows a practical method of assembling ma- 
chine unit data. 



MACHINE UNIT SYSTEM 115 



SUMMARY OF PRODUCTIVE MACHINE UNIT EXPENSE 


Description of machine P. & W. 1-Spindle Drill Presses 

Machine classification. . . .D. A. (Department A, Drilling) 
Nmnber of machines in class 2 


1 


Administration: 

General rate per horn- per man 

Departmental rate per hour per man .... 

Total Administration Rate per horn- per n 


. .. $0.0065 
. .. 0.0154 


lan $0.0219 


2 

3 

4 
5 

6 

7 
8 

9 


Power : 

Kind — Current distributed. 

Units per year — 321 kilowatt 
hours 

Rateper unit— $.0197 

Total 

Rent: Area 24 square feet. 

Annual rate per square foot 

$.5775 

Tool Expense 


Expense for 
Machine 
Class 

$ 6.32 

13.86 
75.00 

8.80 
12.00 
28.00 

18.70 


Expense per 
year per 
Machine 

$ 3.16 

6.93 
37.50 

4.40 

6.00 

14.00 

9.35 


Fixed Charges: Face value 
$88 . 00. Annual rate 10 per 
cent 

Idle Labor Expense 


Unclassified Expense 

Non-Productive Machine Ex- 
pense chargeable hereto .... 

Total Machine Expense per 
year 


$162.68 


$81.34 


10 


Normal Annual Hours of Operation 


1,200 


11 
12 


Summary: 

Rate per Hour 

Administration Rate per Hour (See 1 above) 


$0,068 
0.022 




Machine Unit Rate per Hour of Operation . . 


$0.09 



Note : In such instances where an operator runs more than one machine 
the Administration Rate will be divided proportionately per hour. 



116 SHOP EXPENSE ANALYSIS 

The machine rate of $0.09 per hour found for the 
"1-spindle drill presses" on the specimen summary 
sheet would, if applied to shop costs for 1,200 hours 
of operation, absorb all of the machine expense of 
$81.34 chargeable against this type of machine. Other 
machines of different types having different rates per 
hour would in like manner absorb all of their machine 
expense providing they were operated to normal ca- 
pacity. In this way all of the machine expense would 
be assessed to costs of production each year. There 
remains for consideration the fact, however, that these 
machines may be operated either above or below that 
degree of shop activity which has been considered as 
normal, and hence a variation will immediately exist 
between the current expense and the normal expense 
applied through the machine rates. This difference 
is known as the "current variation" and introduces 
what is known as the supplementary rate of loading 
which must be either added to or subtracted from the 
standard (normal) costs to make them agree with the 
actual expenditures. In the next chapter the writer 
will discuss the theory on which the supplementary 
rate is based, analyze its effect in practical applica- 
tion and criticise its influence on operating conditions. 
Manufacturing is becoming more and more a question 
of specialization and with this specialization has come 
a realization that some of the cost methods which were 
considered reasonable ten years ago do not fit today. 
These questions will be taken up in the following chap- 
ter with a view toward remedying present methods 
so as to meet conditions that exist today in the manu- 
facturing field. 



Chapter VIII 

CURRENT VARIATION RATIOS FOR ADJUST- 
ING CURRENT COSTS 

TN the preceding chapter the writer made the state- 
"*• ment that the machine unit system depends for its 
accuracy on what is known as a supplementary rate. 
It was stated that this rate is the measure of the un- 
distributed portion of the current manufacturing ex- 
pense to costs of production, expressed in the form 
of a percentage of the actual expense applied. If the 
activity of the shop is above normal the rate becomes 
a minus quantity, while if below normal it becomes a 
plus quantity. It is obvious, therefore, that the ma- 
chine unit system is theoretically capable of distribut- 
ing all of the incurred expense at only one degree of 
shop activity, and that is at the normal point. The 
variation between the expense applied and that actu- 
ally incurred for any period becomes a measure of the 
extent to which the expense distributed through the 
medium of the machine unit system will influence costs 
of production. 

To illustrate this point more fully let us study this 
relation as expressed graphically by Chart III. We 
will assume a very simple case of a factory which un- 
der normal operating conditions has a productive labor 
pay roll of $500,000 a year with an equivalent expen- 

117 































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CUKEENT VARIATION' RATIOS 119 

diture for shop expense. That is, under normal ac- 
tivity the expense would equal 100 per cent of the pro- 
ductive labor. The writer has used the productive 
labor in this instance as being indicative of shop ac- 
tivity. Plotting these figures on cross-section paper, 
using the abscissae for "expense" and the ordinates 
for "productive labor," we establish the normal points 
A and F, from which we can construct the line COD 
which intersects the lines A and F at the normal 
point 0. This line C D we shall call the "standard" 
or "machine unit" line, as it is indicative of the 
amount of manufacturing expense distributed to costs 
of production by the machine unit system at any de- 
gree of shop activity. 

A study of the expense figures for any factory will 
show that a certain portion of this expense is fixed; 
that is, it goes on irrespective of the fluctuating de- 
grees of shop activity. This fixed or "constant" ex- 
pense is composed of such items as the salaries of the 
shop superintendent and his assistants, which go on 
irrespective of the amount of effort expended by the 
shop; a certain portion of the power plant expense 
necessitated for heating, lighting, operating elevators, 
etc. ; rent of buildings or its equivalent interest on the 
capital outlay in grounds and buildings ; depreciation, 
insurance, and taxes on the plant and its equipment; 
fire protection expense; care of the tool equipment; 
etc. In fact, there are innumerable other items gov- 
erned by operating factors in different kinds of manu- 
facturing which could be added to those here men- 
tioned. This condition can be fully appreciated by an 
inspection of the average plant during a slack year, 
where it will be seen that a large part of its ' ' expense 
organization" has been kept intact, waiting for a pos- 



120 SHOP EXPENSE ANALYSIS 

sible increase in production activity. A comparison 
of the shop expense figures on the books of the com- 
pany will usually show that while production may have 
fallen off to practically nothing, expense has not been 
reduced in anything like this proportion. 

The average manufacturing company's organization 
is composed of three distinct sub-organizations: gen- 
eral, sales, and manufacturing branches respec- 
tively. These organizations work independently of 
each other to a large extent, especially the sales and 
manufacturing branches. The shop is not concerned 
with the placing of its product nor with the general 
financial policies of the company, and hence has very 
little control, if any, over the volume of its output. Its 
function consists of meeting the requirements of the 
sales organization as reflected either by filling direct 
orders or by stocking up to meet future demands, based 
on the judgment of either the general or the sales^ 
branches of the company, or both. It is therefore a 
most difficult matter for the manufacturing branch to 
anticipate production requirements far enough ahead 
to reduce its floating or variable expense in propor- 
tion. 

According to the customary methods of determining 
costs and distributing overhead, the manufacturing 
organization is charged with all of the expense due to 
factors over which it has no control. The functions of 
the sales and general organizations of a manufactur- 
ing company consist of devising means for keeping 
the shop busy, yet according to present methods the 
shop is charged with all of the short-comings of these 
two other branches. Furthermore, in periods of de- 
pression costs of manufacture often appear high, when 
actually the shop management has shown an increase 



CUBBENT VAEIATION RATIOS 121 

in efficieiicy that would have been reflected by lower 
costs if this additional load due to the constant expense 
were not included. This is readily explained by the 
fact that the manufacturing expense increases (as a 
percentage of productive labor) as the activity of the 
shop decreases, and is due to the influence of the con- 
stant expense which does not show any decrease even 
at the lowest degree of activity. 

A study made by the writer several years ago of 
this very interesting question of "constant expense'* 
in a number of factories showed that it amounted to 
an average of approximately 40 per cent of the total 
manufacturing expense incurred under normal operat- 
ing conditions. This percentage will vary depending 
on circumstances, but experience has shown that where 
all items are considered it will tend to be higher rather 
than lower than the figure here used. 

To illustrate the effect of this constant expense on 
costs of production, in the factory under consideration 
for which we have determined the standard or ma- 
chine unit line on Chart III, let us assume that the 
constant expense amounts to $200,000 a year, or 40 
per cent of the normal shop expense. It is composed 
of that expense which will go on even if each depart- 
ment has only one man employed in production, and 
is indicated on the chart by the point B. If we draw a 
line from this point B through the normal point 0, the 
line so drawn will then indicate the approximate ex- 
pense for any degree of shop activity. It will not nec- 
essarily agree with the actual expense for any current 
period, but will at least be a safe basis for purposes 
of control. 

A study of the relation which this line B E bears 
to the standard or machine unit line COD will show 



122 SHOP EXPENSE ANALYSIS 

very clearly the effect of constant expense on costs un- 
der different conditions of activity. For example, it 
will be noted, first, that these lines coincide at only 
one place, at the normal point 0. At the $400,000 
labor point the expense is already somewhat greater 
than the expense applied through the machine unit 
method, and for each lesser degree of shop activity 
we find a greater variation existing, until at the $100,- 
000 a year productive labor point we find that this ex- 
pense amounts to 160 per cent of the expense dis- 
tributed by the machine unit system. Therefore, if a 
slack period were to reduce the shop activity to one- 
fifth of its normal activity, we should find a greater 
portion of the shop expense undistributed than has 
actually been distributed to costs. This difference is 
known as the "current variation" and is distributed 
to costs in the form of a ''supplementary rate" which 
is added as a percentage to the expense already ap-~ 
plied, as shown in the table opposite for varying de- 
grees of shop activity. 

By referring to the table it will be seen that when 
the activity of the shop is above normal this current 
variation or supplementary rate becomes a minus quan- 
tity (see last column) and the equivalent expense is 
deducted from current costs instead of being added, 
as in the instances cited heretofore. The variation in 
expense for any period is the actual difference between 
the amount incurred and the amount applied. The line 
B E can be safely used by the management for esti- 
mating purposes when the probable activity can be 
determined, but the actual adjustment for this current 
variation is made to conform with the actual current 
expense for any period. This expense will be some- 
where near the expense indicated by the current ex; 



Productive 

labor 
(Normal 
point at 

$500,000) 


Actual 
shop 

expense 
(constant 

expense 
$200,000) 


Estimated 
shop 
expense 
applied to 
current 
costs by 
Machine 

Unit 
System 


Current Varia- 
tion to be 
added to or 
subtracted 
from 
current 
costs 


Per cent 
actual 
expense 

of 
applied 
expense 


Per cent of 
expense ap- 
plied, which 
is to be added 

to or sub- 
tracted from 
current 
costs 


$20,000 
40,000 
60,000 
80,000 
100,000 
120,000 
140,000 
160,000 
180,000 
200,000 
220,000 
240,000 
260,000 
280,000 
300,000 
320,000 
340,000 
360,000 
380,000 
400,000 
420,000 
440,000 
460,000 
480,000 


$212,000 
224,000 
236,000 
248,000 
260,000 
272,000 
284,000 
296,000 
308,000 
320,000 
332,000 
344,000 
356,000 
368,000 
380,000 
392,000 
404,000 
416,000 
428,000 
440,000 
452,000 
464,000 
476,000 
488,000 


$20,000 
40,000 
60,000 
80,000 
100,000 
120,000 
140,000 
160,000 
180,000 
200,000 
220,000 
240,000 
260,000 
280,000 
300,000 
320,000 
340,000 
360,000 
380,000 
400,000 
420,000 
440,000 
460,000 
480,000 


add $192,000 
« 184,000 
« 176,000 
" 168,000 
" 160,000 
" 152,000 
" 144,000 
" 136,000 
« 128,000 
" 120,000 
" 112,000 
" 104,000 
" 96,000 
" 88,000 
" 80,000 

72,000 
" 64,000 

56,000 
« 48,000 
" 40,000 
« 32,000 
" 24,000 
« 16,000 
8,000 


1060 
560 
393 
310 
260 
227 
203 
185 
171 
160 
151 
143 
137 
131 
127 
123 
119 
116 
113 
110 
108 
105 
103 
102 


add 960 

" 460 

« 293 

« 210 

" 160 

" 127 

« 103 

85 

71 

60 

51 

43 

37 

" 31 

27 

23 

19 

16 

13 

10 

8 

5 

3 

2 


500,000 


500,000 


500,000 




100 


Normal 


520,000 
540,000 
560,000 
580,000 
600,000 
620,000 
640,000 
660,000 
680,000 
700,000 


512,000 
524,000 
536,000 
548,000 
560,000 
572,000 
584,000 
596,000 
608,000 
620,000 


520,000 
540,000 
560,000 
580,000 
600,000 
620,000 
640,000 
660,000 
680,000 
700,000 


deduct 8,000 
" 16,000 
« 24,000 
" 32,000 
« 40,000 
" 48,000 
« 56,000 
« 64,000 
" 72,000 
« 80,000 


98 
97 
95 
94 
93 
92 
91 
90 
89 
88 


deduct 2 

3 

5 

6 

7 

8 

9 

« 10 

« 11 

« 12 



123 



124 SHOP EXPENSE ANALYSIS 

pense line B E, if the figures have been correctly 
compiled and conditions affecting it have not changed. 
Differences can be caused, however, by conditions 
which were not foreseen at the time when the normal 
expenses were compiled. These may be due to more 
or less efficient administration of the shop, fluctuations 
in the prices of supplies and expense materials, such 
expenditures as extensive repairs which may be of 
benefit for several years, or to the introduction of 
equipment having a high operating expense but which 
would be more than offset by a reduction in the pro- 
ductive labor account. Any of these items will affect 
the relation of expense to labor ; hence, the importance 
of a proper classification of expense items, on which 
the writer laid particular emphasis in an earlier chap- 
ter, will become apparent, as by such a segregation of 
expenses abnormal increases can be easily diagnosed 
and the proper adjustments made for them. These 
adjustments may also affect the '' constant" expense 
through such items as variation in the rates for in- 
surance, taxes, etc., and adjustments may have to be 
made occasionally to correct these expense figures. 

In order to note the effect on production costs of a 
possible period of depression to the $100,000 labor 
point, let us consider an actual cost summary under 
both the normal and reduced degrees of activity. A 
cost, compiled for a certain article which was manu- 
factured when the shop was operating at the $500,000 
normal labor and expense point 0, might show : 

Productive labor $10. 00 

Manufacturing expense 100 per cent of labor (actually 

distributed on basis of machine hours) 10.00 

Material 5.00 

Total shop cost $25.00 



CUBRENT VARIATION RATIOS 125 

At the $100,000 labor point, however, this same ar- 
ticle would appear to have cost $41, or $16 in excess 
of the normal manufacturing cost, the cost being made 
up as follows: 

Productive labor $10.00 

Manufacturing expense 100 per cent of labor (actually 

distributed on basis of machine hours) 10.00 

Material 5.00 

Standard cost $25.00 

To which is added, Current Variation (160 per cent of 

expense) 16 . 00 

Total shop cost $41 .00 

It is obvious, therefore, that in times of depression 
when the factory needs business most, its basis of 
cost figuring for new work is so prohibitive as to make 
such new business unobtainable. In other words, the 
present scheme of cost accounting falls down when we 
need it the most. "When the activity is above normal, 
this same cost would be even less than that shown 
under normal conditions. Yet at such a time a manu- 
factory could easily shoulder an increase without af- 
fecting its normal costs. We must again revert to the 
factor of constant expense for the cause and solution. 
We have proved that this expense is the cause of this 
variation and have likewise shown the lack of respon- 
sibility which the management shoulders for this ex- 
cess burden on the shop. What, then, is the solution? 

If a shop has excessive floor space beyond its re- 
quirements, the expense incidental thereto would not 
ordinarily be assessed as a burden on the shop. If a 
company had three plants and shut two down, it 
would not charge the remaining one with the upkeep 



126 SHOP EXPENSE ANALYSIS 

of the two idle ones. Yet, is not this same condition 
true if we consider each machine as a separate shop, 
paying for its own rent, depreciation, administration, 
taxes, tools, etc, which is precisely what is done in 
distributing the shop expense by the machine unit sys- 
tem? The facts seem indisputable, and again we ask 
the question. Why does the shop have to bear this 
burden? Is the supplementary rate fair to the shop? 

During the latter part of the year 1907 and through 
most of the year 1908, when the financial panic which 
occurred at that time was manifesting itself with tell- 
ing effect on every phase of our commercial life, one 
of the largest manufacturing companies in the coun- 
try took on contracts for grinding safety-razor blades, 
something entirely different from their regular line of 
product, on the basis of billing this work at shop cost 
as figured at the normal point and with no other ad- 
ditions for profit, etc. The effect of this policy will 
be evident when it is seen that by this scheme the 
activity of the shop was raised to something near the 
normal point, and, hence, the standard product of the 
factory was not loaded with the tremendous burden 
of the constant overhead expense which it would have 
had to bear if this scheme had not been devised for 
spreading it over a greater output. In addition to 
these benefits it must also be remembered that the 
manufacturer kept his organization intact, so that 
when the reaction occurred and business in his line 
improved he was in a commanding position over those 
of his competitors who did not have the foresight to 
adopt a similar policy. 

The writer has cited the foregoing practical ex- 
ample in substantiation of the case against the present 
practice of charging the current variation, as expressed 



CURBENT VABIATION RATIOS 1^7 

by the supplementary rate, against the shop. The 
general or the sales branch of the company in this in- 
stance was able to meet the emergency with rare judg- 
ment and foresight. Yet if it had failed would it 
seem fair to have charged the shop with the short- 
comings of the general or sales branches of the com- 
pany? It certainly does not seem so, and the more 
consideration which we give to this phase of produc- 
tion the more easily is it possible to marshal an in- 
disputable array of facts arguing against the use of 
the supplementary rate as an extra loading on costs of 
production. 

There is still another factor of paramount impor- 
tance pertaining to the supplementary rate. The rapid 
development of automatic machinery in this country 
of late years has introduced an element in the form 
of increased expense with lower labor costs. Where 
formerly a large portion of manufacturing was done 
by manual labor, this has now been superseded by ma- 
chinery, the operation of which entails considerable 
additional expense. Take, for example, the case of 
screw machines which have been developed in practi- 
cally four periods. Originally screws were turned by 
hand ; then pin machines were developed by which the 
turned parts, which had been cut to size, were threaded 
automatically; in the third stage the operations of 
turning and threading were done simultaneously on a 
rod which had been cut off to the correct length ; finally, 
the development was carried to the point where drill- 
ing, tapping, and slotting were added. Each of these 
stages of development has increased the expense, but, 
on the other hand, has reduced manual labor by much 
greater proportion. 

A. Hamilton Church, in his book, ** Expense Bur- 



128 SHOP EXPENSE ANALYSIS 

den," says in justification of the supplementary 
rate, ' ' Cheaper methods of doing work will be promptly 
reflected by this rate." This is true only in such in- 
stances where no improvements, similar to those of the 
automatic machines cited above, are made and where 
the same methods of production exist year in and year 
out. In a modern manufactory, however, where labor- 
saving devices are continually being installed, an in- 
crease or decrease in expense will not necessarily re- 
flect the efficiency of the shop management and might 
even indicate conditions directly contrary to those actu- 
ally existing at the time. Again, in reference to idle 
time, Mr. Church says, "We are obliged, therefore, 
from motives of expediency, to look upon idle time as 
a kind of visitation of ^Providence' which the whole 
shop ought to bear." 

The experience of the writer has been that the gen- 
eral management of a manufactory very often finds 
such visitations of Providence an easy medium for 
shifting its own responsibilities. However, if periods 
of idleness can be traced to Providence, why should 
the shop be the organization to suffer? Surely, it is 
not allied with Providence ! 

It would seem to the writer, from this analysis and 
from a study of conditions in many plants throughout 
the country, that there is something fundamentally 
wrong with our present method of cost compilation. 
Our costs are useless when we need them the most. 
We charge the shop with the shortcomings of the sales 
and general administrative branches of the company, 
and we look upon an increase in shop expense over a 
former period of similar activity as being indicative 
of inefficiency, when the opposite state of affairs may 
be the true condition. Where shall we look, then, for 



CUKRENT VARIATION RATIOS 129 

a remedy 1 If we do not charge the shop with this vari- 
ation in expense, what is to become of it? 

The solution seems to point straight to the manage- 
ment, which alone should assume the '' current varia- 
tion expense, ' ' and not the shop. Manufacturing costs 
would then reflect production efficiency, not through the 
component parts of costs, such as labor, material, and 
expense, but by the summaries of these three elements 
for different classes of work. If the shop activity falls 
below normal, the surplus expense as expressed by the 
current variation or supplementary rate could be 
charged to a separate account, where it will remain 
until it is offset by credits due to activity above normal 
or until it is charged up to the management. 

The expense chargeable against the shop should he 
that portion of the constant expense which the current 
activity is of the normal activity, plus the actual cur- 
rent variable expense. That is, if the activity for a cer- 
tain year was found to be 60 per cent of the normal 
activity, then the expense chargeable against the shop 
for that year would be 60 per cent of the constant 
expense, plus the actual variable expense incurred dur- 
ing that period. At the $100,000 productive labor point 
on Chart III the manufacturing expense would be 
20 per cent of the $200,000 constant expense ($40,- 
000), plus the variable expense {BE) $60,000, making 
a total of $100,000, which is the same as that indicated 
by the machine unit line COD. In specific instances 
this line might be a curve rather than a straight line, 
but this can be readily detei*mined from an analysis 
of the expense figures for different periods. 

While Ave have been considering instances where the 
shop activity has fallen below normal, we must not 
lose sight of the fact that it is just as possible for the 



130 SHOP EXPENSE ANALYSIS 

output of the factory to rise above the normal point 
as it is to fall below it. 

When the activity of the shop is above normal the 
amount of expense chargeable against costs of produc- 
tion will be greater than the actual expense incurred. 
This additional expense is measured by the variation 
existing between the machine unit line COD and the 
current expense line B E at any specific degree of 
shop activity. It will be seen, therefore, that inasmuch 
as the expense applied through the machine unit system 
as indicated by the line COD will be greater than the 
actual shop expense incurred as indicated by the line 
B E, then when the shop is operating above the nor- 
mal point this excess expense naturally becomes a 
credit to the general management. Credits of this na- 
ture will tend to offset charges made against the man- 
agement when the factory is operating below normal 
and will, if taken over a period of years, reflect the 
efficiency of the administration. 

A careful analysis and study of the method herein 
advocated by the writer will show several very de- 
cided advantages over the old method of applying a 
supplementary rate. By this new method the shop in 
times of prosperity will absorb a greater amount of 
expense than is actually incurred, which will tend to off- 
set and equalize benefits which it has derived during 
periods of depression. In like manner the general 
management will receive credit for increasing the pro- 
duction activity above normal, and in this way have a 
chance also to equalize charges which were made 
against it during periods when the production fell be- 
low normal. By this method, costs will be low when 
business is most needed and will be higher when busi- 
ness is more easily obtainable. Furthermore, shop 



CUEEENT VABIATION RA.TIOS 131 

costs will be comparative and will reflect the efficiency 
of the shop administration for different periods. 

The writer has endeavored to point out in the fore- 
going eight chapters on ''manufacturing expense" dis- 
tribution the ramifications of this most important ele- 
ment pertaining to production, and has hoped to show 
the effect of both correct and incorrect methods of dis- 
tributing this expense on the ultimate achievements of 
a manufacturing business. The manufacturer who to- 
day looks upon his so-called "overhead" as a loss is 
far behind the procession, and he must either get 
abreast of it or fall by the wayside. Expense today, 
as exemplified and incurred by planning and routing 
departments, statistical corps, time studies, and all of 
the other phases of scientific management, is a neces- 
sary adjunct to production, and should really cease to 
be classified as expense in the strict sense of the word. 
Manufacturers are often too prone to consider the 
terms ''waste" and "expense" as synonymous. The 
extent to which cost reduction can be carried depends 
to a large degree upon the capacity of the management 
to incur expense with this end in view. Too much em- 
phasis cannot be laid, therefore, on the proper inter- 
pretation of w^hat we have chosen to call "expense." 
Some manufacturers w^ho still consider the term in its 
old sense remind the writer of the story told of the 
farmer who criticised the city clocks for the reason 
that, of the five he saw in the course of a mile walk, no 
two agreed as to the time. 

Conditions change, progress is being made, and new 
methods are being developed from day to day on the 
basis of past experience. Hence, it behooves those 
who would forge ahead to keep posted on these various 
changes. 



Chapter IX 

OEGANIZATION 

^T^HE question of organization is so closely allied 
■*■ with that of the proper control of the indirect or 
overhead expense of a manufacturing establishment 
that it is of paramount importance to give careful 
consideration to the scope and efficiency of the various 
types of organizations in use today. 

Factory management may be arbitrarily divided into 
** superficial'^ or rule-of-thumb management and "sci- 
entific" or intensive management respectively. The 
former relies for its successful operation on the par- 
ticular ability of the executive in control of the plant, 
while the latter divides this responsibility among a 
group of functional specialists, known as the operat- 
ing staff. 

The two distinct types of modern industrial organi- 
zation in use today are known as the "military" or line 
type of organization and the "functional" or staff 
form of organization. The former derives its title from 
its parallel as found in organizations of a military 
character, where responsibility for the successful car- 
rying out of any order is passed down through a long 
line of officers until it finally reaches the private in the 
ranks, or the workman at his bench or machine as 
found in the industrial counterpart. The functional 

132 



ORGANIZATION 133 

type of organization differs from the military in that 
it passes responsibility up the line, where it really be- 
longs, to the functional specialists, an outline of whose 
duties will be discussed more fully a little later on in 
this chapter. 

Both of these types of organization are in use 
throughout the industrial field, but in view of the won- 
derful strides which the functional type has been mak- 
ing during the past few years, it would seem reasonable 
to assume that it will eventually supplant, if not en- 
tirely, at least to a large extent, the military or line 
type of organization. 

The late Frederick Winslow Taylor very properly 
classified the military form of management as "man- 
agement of initiative and incentive." It is what is 
commonly called the rule-of-thumb method of pro- 
cedure. Functional management relies for its success 
in operation on specialization by functions of manu- 
facturing, centered in a staff of men rather than in one 
head who is supposed to be qualified to direct all of 
these functions himself. 

Under functional management the department fore- 
man — who, under the military form, held full sway 
over all of the various functions of his department, 
which included the hiring of labor, the setting up of 
machines, the selection of tools and equipment, the de- 
termination of cutting speeds, and often even the rout- 
ing of materials in process — is now superseded by a 
corps of specialists, each of whom has his own line of 
activity to pursue. These specialists we find typified 
in the modern speed boss, repair boss, gang boss, in- 
spector, disciplinarian, route clerk, piece-work clerk, 
time clerk, etc., all of whom, while acting independently 
of each other, form a coordination of the various units 



134 SHOP EXPENSE ANALYSIS 

and functions of the factory, thereby achieving a much 
greater degree of efficiency than that possible under 
the hit-or-miss method as exemplified by the military 
form of organization. 

This history of industrialism brings out some very 
interesting points which it might be worth while to con- 
sider at this time, especially with respect to the mar- 
vellous growth of manufacturing since the beginning 
of the nineteenth century. The history of ancient 
Egypt shows us that her skilled artisans consisted of 
brickworkers, weavers, upholsterers, potters, black- 
smiths, coppersmiths, glass blowers, shoemakers, ar- 
morers, etc., all of whom are found in counterpart in 
our industries today. In fact going back still further 
we find that mention is made of iron tools being used 
during the time of Solomon, and of axes, saws, ham- 
mers and nails during the time of David. Saws, picks, 
armor, and helmets have been found in the ruins of^ 
Nineveh, and many other excavations have conclusively 
proven that as far back as the history of our modern 
existence can be traced evidence is found substantiat- 
ing the fact that some portion of the peoples of those 
times were engaged in what we call manufacturing. 
Even as far back as the period portrayed in the fourth 
chapter of Genesis we find reference made to a man 
called Tubal Cain, who was born seven generations 
after Adam and who is spoken of as "the forger of 
every cutting instrument of brass and iron.'* 

Up to the beginning of the nineteenth century, how- 
ever, the growth of manufacturing as a means of occu- 
pation and livelihood had not progressed very rapidly. 
A bulletin issued by the Bureau of Census, U. S. De- 
partment of Commerce and Labor, in 1900, entitled ''A 
Century of Population Growth," states that "at the 



OBGANIZATION 135 

dose of the eighteenth century the greater part of the 
inhabitants of the United States derived their support 
from agriculture, nine-tenths of the bread winners be- 
ing so engaged. ' * What little manufacturing was done 
then was practically all for home consumption. 

Speaking before the House of Eepresentatives in 
1791, Alexander Hamilton gave a *' Report on Manu- 
factures," in which he laid much stress on "the vast 
scheme of household manufacturing" which then ex- 
isted in the original thirteen states of the Union. His 
report stated that ''great quantities of coarse clothes, 
coatings, serges, hosiery of wool, cotton and threads, 
jeans and muslins, checked and striped cotton and 
linen goods, table linen, etc.," were made in a house- 
hold way to an extent in many cases not only suffi- 
cient for the supply of the family in which they were 
made, but for sale and even, in some cases, for ex- 
portation. 

Compared with the ninety per cent of population 
engaged in agriculture at the close of the eighteenth 
century, we find approximately only one-third of the 
population so engaged in 1900. It will therefore be 
seen that more progress has been made in the manu- 
facturing field of industry since the beginning of the 
nineteenth century than had theretofore been made 
since the beginning of man's existence. The rapid 
growth during the past century has been directly due 
to the improvements made in machinery and other 
operating methods. "With this evolution we find, how- 
ever, that a finer and finer allocation of the various 
factors entering into production has had to be made, 
caused first by competition, and later by what is known 
as functional or scientific management. 

The change from hand labor to machinery, which 



136 SHOP EXPENSE ANALYSIS 

occurred during the early part of the nineteenth cen- 
tury, caused such an upheaval of methods in manufac- 
turing that it has often been referred to as the period 
of the industrial revolution. Up to that time each 
workman had his own spinning wheels, looms, etc., 
and lived almost entirely by the product of his own 
individual effort. Following the introduction of ma- 
chinery, however, these workmen were no longer able 
to maintain their industrial entity, because of the fact 
that machinery made possible a much greater output 
at a correspondingly lower cost than was possible by 
the methods in vogue prior to that time. The cost 
of these machines being too prohibitive to permit each 
workman to own his own equipment, naturally the 
workers split up into groups, pooled their financial 
resources, built factories, and equipped them with ma- 
chinery. 

Those workers who did not have the necessary capi- 
tal to join one or another of these groups found em- 
ployment with those who did, and hence we find at this 
point the origin of our modern system of industrial 
organization due to the replacement of individual ef- 
fort by collective effort. The early effect of this col- 
lective effort, forced through the introduction of ma- 
chinery, can be noted by comparing the cost of cotton 
thread which in the year 1786 cost thirteen times what 
it did in the year 1832. In 1800 a hand weaver earned 
on an average of 25 shillings a week in England, as 
compared with only 5i/^ shillings in 1830. 

As these manufacturing enterprises grew and ex- 
panded, each in their chosen field, certain men were 
naturally selected to oversee the work of others, and 
so industrial organization has grown and expanded 
until we find its outgrowth in such marvellous and 



OEQANIZATION 137 

efficient examples as the U. S. Steel Corporation, the 
Standard Oil Company, the Krupp Works of Germany, 
and the Sheffield Steel Works of England. 

From the foregoing brief outline of the evolution 
of industrialism it is apparent that the development 
has been accomplished by three distinct stages of ef- 
fort : First we find individual elf ort with no organiza- 
tion ; then collective effort with a military form of or- 
ganization; and finally collective effort with its func- 
tional form of organization, the latter being in process 
of development at the present time. Each of these 
three stages of industrial development has been a step 
forward in specialization. Wherever specialization 
has been resorted to — in the arts, science, commerce, 
etc. — the then existing methods have aJmost without 
exception been discarded for more efficient ones ; and, 
as the keynote of functional organization is specializa- 
tion and because such specialization is conducive to 
greater efficiency wherever appHed, it would seem rea- 
sonable to presume that collective effort with its mili- 
tary form of organization must eventually give way to 
functional specialization, just as surely as individual 
effort was supplanted one hundred years ago by col- 
lective effort. 

A weak point in our industrial scheme is that we are 
often too prone to look upon the expense of maintain- 
ing an efficient organization as just so much non-pro- 
ductive expense. This policy of near-sightedness has 
been the cause of many failures in the manufacturing 
field as well as in other lines of business ; and therefore 
the sooner that our manufacturers come to realize this 
in its true significance, the sooner will greater economy 
be experienced. 

Andrew Carnegie when asked some years ago 



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ORGANIZATION 139 

which he would choose to retain if it were necessary 
for him to part with either his wonderfully efficient 
steel plants or his directing organization, very 
promptly replied that he would instantly choose to re- 
tain his organization. His factory plants, he said, could 
be duplicated if necessary, but the organization which 
it had taken him years to perfect and weld together 
and on which the success of his business depended 
was something almost impossible of replacement within 
any reasonable period of time. It is therefore worthy 
of notice that an efficient organization has an intrinsic 
value in dollars and cents which can be measured by 
its coordination to accomplish certain definite results 
efficiently. 

In order to present a comprehensive comparison of 
the differences which exist between organizations of a 
military form and those of the functional form, let us 
analyze them graphically. It is always good practice 
to draw up a chart of the organization of a manufac- 
turing or any other company, as by this means a 
quicker portrayal of all of the various units making up 
the complete organization is possible than by any other 
means. 

Chart IV, opposite, shows a method of plotting a 
large and complex manufacturing organization of the 
military type. In drawing up such an organization 
chart careful consideration should be given to the 
methods of grouping the various units. The scope of 
the various departments must be studied and the de- 
partments then grouped to get the best results. A 
standard method of designating the various units is 
decided upon. The manufactory is divided into its va- 
rious branches; the branches are then divided into 
divisions, the divisions into departments, the depart- 



140 SHOP EXPENSE ANALYSIS 

ments into sections, and the sections into groups or 
gangs, each having its own special organization. These 
various sub-divisions may then be assembled in a chart 
which will show their relations. 

The organization shown by Chart IV is that of a 
typical metal working company. Here we see the plant 
divided into five distinct branches — mechanical, manu- 
facturing, inspection, service and maintenance, and 
production and clerical. 

The mechanical branch is composed of the purely 
mechanical departments, such as tool design, tool mak- 
ing, pattern making, etc., and is usually under the 
supervision of the master mechanic. 

The manufacturing branch includes all of those de- 
partments which are actually engaged in productive 
work. This branch, as shown by the chart, is subdi- 
vided into the foundry, machine, finishing and special 
divisions respectively, each being under the supervision 
of a division head to whom the foremen of the various 
departments report. The general foreman is in charge 
of this branch of the organization and is held respon- 
sible for the output and quality of workmanship of the 
various departments coming under his supervision. 

The inspection branch comprises the raw material, 
process, final, and tool inspection departments respec- 
tively, and also in many cases a chemical and physical 
laboratory used for testing and inspection purposes, 
such as determining the specific gravity of oils, or the 
hardness of steels in accordance with specification re- 
quirements. Each of these several stages of inspection 
is essential from an efficient operating standpoint as 
well as from a quality point of view. Efficient inspec- 
tion will reduce the factor of waste to a large degree, 
especially that which is incurred in the form of labor 



ORGANIZATION 141 

which would otherwise have been employed on defec- 
tive material. Here again we see the relation between 
organization and overhead expense control. 

The highest standard of quality and workmanship 
can be best attained where the inspection department 
is not influenced in any way by those concerned with 
the various phases of purchasing or production. 
Where the organization of the inspection department 
is not of a distinct unit nature it will be readily ap- 
preciated that the decisions of departmental inspec- 
tors, who through faulty organization are under the 
jurisdiction of the foremen of these departments, will 
tend to be biased in favor of such departments. Self- 
preservation being the first law of nature, criticism of 
the inspector in such cases for failing to antagonize his 
superior by reporting bad workmanship or mistakes 
and errors is hardly just. The fault lies with th^ 
management rather than with the immediate point of 
attack. 

While this state of affairs can be easily remedied by 
taking the local inspector from under the jurisdiction 
of department heads, which is done by keeping the in- 
spection branch of the company distinct from the man- 
ufacturing branch, it should be clearly understood that 
the work of the inspection branch must at all times be 
in full sympathy with the manufacturing work and 
that a state of cooperation should exist which will make 
such coordination possible. 

The scope of the inspection branch of a manufactur- 
ing organization is so broad and its operation is so 
closely allied with the success or failure of the busi- 
ness that the executive head of this organization unit 
should be chosen most carefully. He should be a man 
thoroughly experienced in shop methods and in engi- 



142 SHOP EXPENSE ANALYSIS 

neering principles and practice, and have an extensive 
knowledge of the uses to which the manufactured prod- 
uct is put after it reached the ultimate consumer. The 
average sales organization is usually too anxious to 
hold the factory accountable, without careful investi- 
gation, for all complaints of its customers as to unsat- 
isfactory workmanship, material, etc. As the chief in- 
spector is the one to whom these complaints are eventu- 
ally made he often comes in direct contact with the 
customer through his investigation and report on the 
case, and in this way can be of valuable service to the 
company by making these reports of such a thorough 
and convincing nature that the customer may see the 
matter in an entirely different light. 

The next division shown by Chart IV is that of the 
service and maintenance branch. This branch is under 
the supervision of the factory engineer, and is here 
shown as comprised of the factory service department, 
house carpenters' department, millwright department, 
steam and electric generating plant, and house wiring 
department. All of these departments are engaged in 
providing suitable accommodation for the enactment 
of work throughout the factory plant. 

The production and clerical branch is seen in this 
organization to be comprised of two distinct divisions : 
First, the production division, which includes the shop 
stores, stock records, shop tracing and receiving de- 
partments respectively, all of which are engaged in 
exercising their respective functions in connection with 
the question of materials ; and second, the clerical and 
accounting division, which includes such office depart- 
ments as the shop cost, shop expense, payroll, em- 
ployment, piece-work rates, voucher, shop purchasing, 
and efficiency departments respectively, all of which 



OEGANIZATION 143 

are engaged in keeping and furnishing statistics for 
controlling the various units of the factory, devising 
and installing methods conducive to accurate cost find- 
ing, compiling piece-work rates, and controlling waste 
by proper accounting and statistical information. This 
branch of the company is under the supervision of a 
production engineer, whose qualifications should in- 
clude those of a mechanical engineer, office manager, 
and expert accountant. 

While the organisation shown by Chart IV is a good 
one as a military or line organization type, it does not 
endeavor, as will be seen by a closer inspection of the 
chart, to specialize in functions below those included 
in the several main branches which have just been dis- 
cussed. For example, it is left entirely optional with 
the department foremen to decide at what speeds their 
machines shall be operated, what class of labor shall be 
employed, which machines shall be used for certain 
classes of work, what discipline shall be meted out to 
the operatives for real or seeming infractions of the 
rules, etc. In this way it differs from the functional 
or staff form of organization, where these matters are 
taken entirely out of the jurisdiction of the department 
foremen and reposed in the staff of functional special- 
ists, as will be seen later in the analysis of the func- 
tional organization. 

While the illustration which the writer has used per- 
tains to the machine shop type of manufacturing, the 
same methods of dividing and subdividing the organi- 
zation, where the military form of management pre- 
vails, applies also to other lines. In a paint factory, 
for example, very different conditions hold than in a 
machine shop, yet the method of subdividing is not 
dissimilar. The purpose of a military form of organi- 




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ORGANIZATION 145 

zation is simply to divide the plant so closely that the 
duties and scope of each part thereof are so plainly 
mapped out that friction between the various units 
will be practically eliminated. 

Chart V shows a method of mapping out a func- 
tional form of organization. The example used is that 
of a factory plant consisting of a brass foundry and 
machine shop. In fact, it is very much like the class 
of work done by the manufactory shown by Chart IV, 
although it differs materially, however, from the view- 
point of organization and operation. The responsi- 
bility instead of being centered in the head of each 
branch, as in Chart IV, is here reposed in a staff who 
specialize in various functions pertaining to produc- 
tion. In Chart V we see this functional specialization 
covering equipment, service and maintenance, labor, 
material, despatch, inspection, and accounting respec- 
tively, and that its jurisdiction includes both the foun- 
dry and metal working shop. 

The writer wishes to call special attention, before 
proceeding further with this discussion on functional 
analysis, to the two important controlling factors des- 
ignated as "financial budget" and "symmetry of ap- 
propriations" respectively. The first of these repre- 
sents the amount of money available for manufactur- 
ing; and the second, the expenditure of this fund for 
the carrying on of this work. Symmetry of appropria- 
tions means the disbursement of the available fund ac- 
cording to carefully thought out lines of procedure and 
in such proportions that no one or more of the ele- 
ments entering into production will suffer because of 
an excessive appropriation made for some other part. 

It is a lamentable fact that more attention has not 
been given to this question of the distribution of manu- 



146 SHOP EXPENSE ANALYSIS 

facturing funds, especially by our leading exponents 
of scientific management. In accordance with the old 
rule, ''a chain is no stronger than its weakest link," 
the whole structure of successful plant operation de- 
pends on the proper allotment of plant expenditures. 
It applies not only to active plants, but to contemplated 
ones as well. Unless a sufficient amount of the avail- 
able capital is set aside for the purchasing of material 
and the hiring of labor, for instance, what will it profit 
a company to have splendid up-to-date equipment in 
the form of machinery and tools unless this equipment 
can be operated by workmen and can be supplied mth 
material? In like manner, what profit can be realized 
on excessive production which cannot be marketed, and 
which remains in stock-rooms until it very often be- 
comes obsolete through changes or improvements in 
application or design? 

The writer has been thrown in contact with this same 
question in new plants where, through failure to con- 
sider this matter in its true significance, beautiful 
plants have been erected and money lavishly expended 
for equipment, only to end in financial disaster because 
of lack of funds to keep the plant supplied with the 
necessary labor and material. The factor of plant lo- 
cation also very often seriously affects this question, 
especially in such cases where through more or less 
isolation of the factory site, labor is hard to obtain or 
excessive payment has to be made as an incentive to 
secure help. 

Still another factor is that of the indirect or over- 
head expense, which most manufacturers, largely 
through ignorance in this most important element en- 
tering into manufacturing, fail to comprehend and pro- 
vide for in their plant appropriations. No provision 



ORGANIZATION ' 147 

is made for depreciation of buildings and equipment ; 
no reserve is set aside to provide for fire or accident 
contingencies ; no attention is given to the question of 
repairs, upkeep, etc. The direct effect produced by 
failure to give any or all of these matters proper con- 
sideration at the time of making up the shop budget, 
is that the entire scheme of manufacturing is carried 
on in anything but a scientific manner, and that some 
one or more parts of the factory as a whole are bene- 
fiting at the expense of others. The importance of 
establishing a degree of symmetry in making manufac- 
turing appropriations will therefore be readily under- 
stood. A perfectly balanced scheme of production is 
a prerequisite to efficient plant operation and should 
as such be considered of paramount importance from 
a management viewpoint. 

Eeverting again to Chart V, we find that the func- 
tional form of organization differs from the military 
or line type of organization shown by Chart IV in that 
the entire system of production rests in the staff of 
functional specialists ; with the result that responsibil- 
ity, instead of being passed down the line as under the 
military plan, is passed up the line to the operating 
staff. Therefore, instead of the general foreman, 
shown at the head of the manufacturing branch in 
Chart IV, attending to all matters pertaining to the 
actual manufacturing done in the foundry and ma- 
chine shops, this responsibility is taken away from him 
and transferred to the functional staff. In like manner 
it practically divests the departmental foreman of all 
responsibility except that of seeing that the workmen 
keep busy and conform to the required standard of 
discipline. Even in such matters of discipline these 
foremen cannot act entirely independent of the staff, 









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ORGANIZATION 149 

which includes a labor section as will be seen in 
Chart V. 

To the close student of this question of organization 
the advantages of the functional over the line or mili- 
tary type will be especially apparent when considered 
from an expansion point of view. It permits of a much 
greater degree of flexibility, which makes it possible to 
adapt itself easily to any sudden growth of the busi- 
ness as a whole. It shifts the additional study, plan- 
ning, and responsibility for this extra work to the 
staff, instead of loading up the foreman and his assist- 
ants with all of this cumbersome amount of detail. In 
relieving the departmental heads of this detail it there- 
fore permits them to get a much better perspective of 
existing conditions, and consequently to attain a 
greater degree of efficiency. 

Chart VI shows the functional plan originated by 
Frederick W. Taylor. While it differs considerably 
from that shown by Chart V, the effect of the principles 
of functional specialization laid down by Taylor can be 
readily seen in this later organization chart. Chart V 
when considered in comparison with Chart VI also 
shows fairly well the advancement which has been 
made along this line of functional specialization. And 
so, while the principles established by Taylor hold more 
true now than ever, the extent to which these princi- 
ples have been amplified during the past few years and 
the apparent possibilities of further amplification and 
improvement force the opinion that this question of 
functional organization has been and will be carried 
further than Taylor had dared hope for or believed 
possible when he laid down his doctrine. 

By referring again to Chart V it will be noted that 
after the actual production phase of the work is en- 



EXECUTIVE DEPARTMENT 



PRESIDENT 
Vice-B-esidanf in charge of OperaHon. Vice Presidenf in Charge of Real Estate 
Resident Assistant to V/ce President In Purchases and Insurance, 
charga of Operation, lieiv YorA. Vice President in Charge of Accounting 
Vice President in Charge of TroFflc. Secretary. 
Vice President in Charge of Finance. Treasurer. 
' ' ' ' ■ '^-^ 1 



Legal Depf. Engineering Dept. Chief Mechanicof 

O^neroJ Counsel Chief Engineer Engineer 



Vice President in charge of Operation 
(Resident Ass/-, fa VP ■' " - " tier* York) 



OPERATING DEPARTMENT 
General Manager 

.n — Tz — ^~~~~. ' r 



G en era I Superintendent Transportation Supt. of Stations 

Suph freight Trans. Supt. Aissenger Trans. 

I 1 

Supt. of Car Service General Supt. of Motive thfter 

\ 1 \ 1 ■ 

Engineer Maintenance of Wai/ Valuation Engineer Signal Engineer 

Suff of Telegraph General Superintendents. General Dlyisions 

Supt, ofMofl^efbwer I Principal Asst. Engineer 

Superintendents, Local Divisions 

I 

Agents, Local Freight and fbisen^er Stations 



Vice F^esident In Charge of Traffic 

TRAFFIC DEPARTMENT 

Traffic Manager 
freight Traffic Manager 



General Freight Agent 

I 
Division Freight Agents 

Agents St. freig ht Solicitors 



Passenger Traffic Manager 



Freight Claim Agent 

Cool Traf fic Manager 



1 

General Passenger Agent 

Division Passenger Agents 
District Pa ssenger Solicitors 
General Baggage Agent 



Vice President in ch oroid of Finance 
I ' ' I 

Treasury Department Emp/oyes Saving Fund 

Treasurer Superintendent 



Vice President in charge of Real Estate, Pi/rchases and Insurance 
Real Estate Department Insurance Department fhrchasing Department 
Real Estate Agent Supt In surance Depf. Purchasing Agent 



Vice President In charge of Accounting 
Accounting Department 
Comptroller 

Auditors Nf.FiCKCK. 



CHART VII. TYPICAL RAILWAY ORGANIZATION 

150 



ORGANIZATION 151 

tered into, a further division is made by process points. 
For example, in the foundry the separate sections as 
indicated by core-making, moulding, melting, and clean- 
ing respectively become actual process points, for the 
reason that each completely performs its respective 
process operation. The cores are first made in the 
core room, the mould is then made from the pattern, 
the metal is melted and poured into the moulds, and 
the casting so produced is finally cleaned. Each of 
these operations represents a complete process point. 
The time actually consumed by each process point is 
called a process period, and the unit of such a period 
is the process hour. 

While we find these process points easy of alloca- 
tion in the foundry, it is somewhat more difficult, how- 
ever, to segregate them in the metal shop, also indi- 
cated on Chart V. An automatic machine, for example, 
may be a process point, while on the other hand a gang 
of six or seven men may also be a process point. The 
segregation of these process points under the func- 
tional plan of organization makes possible a greater 
control than where these distinctions are not made. 
The process hours for any process point can be used, 
for example, as a basis of overhead expense distribu- 
tion or for authorizing expenditures during any pe- 
riod, based on the estimated total of process hours for 
that period. In this way a much finer allocation of the 
indirect shop expense can be made than where this ex- 
pense is simply split up by departments. This, then, 
results not only in better control from an executive 
viewpoint, but also it produces truer costs of produc- 
tion because of the finer allocation of expense by proc- 
ess points. 

Chart VII shows a combination of the functional 



152 SHOP EXPENSE ANALYSIS 

and line type of organization as used by the Pennsyl- 
vania Railroad Company. Here we see a staff com- 
posed primarily of the vice-presidents of the company, 
each of whom has what might be called general func- 
tional supervision over his branch of the business. The 
functional specialization is not carried out so exten- 
sively, however, as is that indicated by Chart V, as it 
is composed mainly of a line type of organization for 
each branch. But exceptions are found in committees 
formed to exercise functional supervision. For ex- 
ample, a discipUne committee composed of freight 
agents from various stations on a local division, make 
suggestions and recommendations to the superinten- 
dent of the local division relative to the action to be 
taken on cases covering breaches of discipline. 

Another example is that of the cooperative claims 
committee, composed of a representative from each 
station of a local division, who makes suggestions and 
recommendations to the superintendent of the local 
division (copy of which is also sent to the superinten- 
dent of stations and transfer) relative to the elimina- 
tion of causes of losses and damage. Other commit- 
tees in like manner make investigations, suggestions, 
and recommendations and report to their respective 
organization heads; so that while we find here a line 
type of control existing, it is supplemented by author- 
ity reposed in special committees. 

In summing up this question of industrial organi- 
zation with respect to its relation to indirect or over- 
head expense, it need simply be reiterated that the 
distribution and control of this expense vary practi- 
cally directly in proportion with the degree to which 
the factor of organization has been developed in any 
plant. We have seen how the functional form of or- 



ORGANIZATION 153 

ganization is rapidly supplanting the old military form 
simply because it offers a better means of executive 
control over all phases of production. The writer has 
endeavored to show also how this can be used to con- 
trol directly the extent of the charges to indirect ex- 
pense by allocation according to process points. It will 
be seen, therefore, that much depends on the selection 
and operation of the proper type of organization for 
specific classes of manufacturing. 



Chapter X 
WASTE IN MANUFACTURING 

WASTE in a manufacturing establishment may be 
arbitrarily divided into three main divisions — 
material waste, time waste, and miscellaneous waste. 

Material waste may be divided into raw material 
waste, worked material waste, and finished material 
waste. Raw material waste comprises such waste 
as that induced by wasteful cutting of stock, shrinkage 
in stock rooms, discarding or junking of material which 
is found defective and which had been accepted at the 
time of purchase because of poor inspection, and such 
waste as may be incurred through the improper storing 
of raw materials which may result in fires, leakage, etc. 

Worked material waste is due to defective workman- 
ship; lax stock-room system; defective work and er- 
rors in manufacturing ; shrinkage in stock room due to 
stealing, etc. ; losses sustained through forced sales of 
over-stock at sacrifice prices ; bad castings from foun- 
dries, which are not discovered until considerable ma- 
chine work has been done on them; shrinkage sus- 
tained in melting metals in the foundry ; and such waste 
as that incurred through a lack of proper inspection 
of work done on a piece-work basis, where the quality 
of the product is sacrificed and where mistakes are 
made because of haste on the part of the workmen 

154 



WASTE IN MANUFACTURING 155 

in rushing through maximum quantities in a given pe- 
riod of time. 

Finished material waste is caused by stock-room 
shrinkage, leakage, junking of obsolete merchandise 
which has been stocked up, loss sustained due to dam- 
age to the finish of completely assembled merchan- 
dise because of faulty stocking and handling, poor 
judgment used in the disposal of junk or scrap metals, 
and to stealing and other results of poor stock-keeping 
methods. 

In enumerating the foregoing varieties of material 
waste it is not the intention of the writer to convey 
the impression that these cover by any means all of 
the many factors which enter into the loss of ma- 
terials, but simply to show in a general way some of 
the main forms of waste which can be grouped under 
each division. The student of this question will un- 
doubtedly be able to add many other illustrations from 
personal experience or after investigation. While it is 
often impossible to inaugurate methods for curbing 
such sources of material waste as those found in the 
form of defective castings where blow holes do not 
appear on the surface, it is true, nevertheless, that in 
the vast majority of cases the large losses which are 
incurred can be eliminated by a proper and efficient 
form of factory management. 

A concrete illustration of material waste was re- 
cently found by the writer in a plant engaged in the 
manufacture of automobile parts. Much of the work 
of this company consisted in the welding by oxy-acety- 
lene and soldering of manifold pipes, in which work a 
large quantity of silver solder was used. This solder 
was purchased in small bars at a cost of approximately 
$2.50 per pound. The management provided no method 



156 SHOP EXPENSE ANALYSIS 

for checking either the purchases or the consumption 
of this valuable material ; with the result that purchase 
requisitions for additional solder were issued whenever 
the stock on hand got low. Even then, when this stock 
was received it was immediately sent to the several 
store rooms in the shop, from which it was later drawn 
as needed by the workmen, without being weighed or 
the quantity previously drawn out and used being 
checked. The workman simply filled out a requisition 
on the stock room for as much as he thought he needed 
at any given time, and had the foreman 0. K. these 
requisitions. It would seem reasonable to suppose that 
a foreman of any executive ability whatever would 
have kept some sort of a check on the consumption of 
this silver solder by the workmen in his department 
for his own protection. The facts in the case, however, 
showed that because of the volume of work which he 
was called upon to supervise the foreman never found 
time to look into this question and, in fact, never con- 
sidered it of enough importance to require more atten- 
tion on his part than the small amount of time con- 
sumed in initialing the requisitions brought to him for 
approval by his workmen. 

In order to appreciate fully what this leakage meant 
to the manufacturing company concerned it might be 
stated that the matter was first discovered by the writer 
through curiosity in asking the management what it 
was that caused the peculiar bright appearance of the 
cracks in the floors of the departments where this sil- 
ver solder was used. It was found on investigation 
that this material had been used so carelessly and 
promiscuously that small pieces had become scattered 
over the floors in such abundance that the floors were 
practically inlaid with silver. This matter was brought 



WASTE IN MANUFACTUEING 157 

to the attention of the management, and when the 
quantity of the silver solder which should have been 
consumed on the basis of the past year's output was es- 
timated, it was found that the value of the amount so 
used was $10,000. A further examination of the pur- 
chases of the company for that period, with proper 
allowance for the amount of stock on hand at the be- 
ginning and end of the period, showed that the ac- 
tual consumption amounted to approximately $35,000. 
From these figures it was seen that a waste of $25,000 
a year, or 250 per cent of the stock required, was in- 
curred. 

It seems almost inconceivable that a condition such 
as the one just cited could have existed without 
the knowledge of the factory management. That it 
did exist, however, is an actuality; and the extent of 
the waste involved as measured in dollars and cents 
is certainly chargeable in much greater proportion to 
the inefficient form of management than to loss in- 
curred by indiscriminate waste and stealing. If a 
proper form of store-room control had been in exist- 
ence, and if the foremen had had this question brought 
forcibly to their attention, together with the proper in- 
structions for exercising control over this material, 
such a condition could not have existed. 

In justice to the management in charge at the plant 
above mentioned, it might be stated that in practically 
all other phases of their manufacturing routine effi- 
cient methods of control were in operation. It was 
mainly through a lack of a proper accounting system 
capable of showing at periodic intervals such leaks of 
vital importance as the one illustrated that losses of 
this kind were possible. It is hardly necessary to add 
that after the presentation of these facts the man- 




GQ 



188 



WASTE IN MANUFACTURING 159 

agement did not lose much time in making provisions 
for exercising the proper form of control. 

Another form of "worked material waste'' was 
found by the writer in a plant engaged in the manufac- 
ture of brass goods. The brass foundry melted, on an 
average, six million pounds of metal each year in up- 
right tilting furnaces, using coke fuel and with com- 
bustion induced by the air blast method. Examination 
of the records of the company showed that a shrink- 
age of eight per cent took place from the time the ingot 
copper and other metals were sent to the foundry to 
the time the finished castings were sent to the chipping 
and sand-blasting section of the foundry. 

The value of the raw material in this case was only 
twenty cents per pound at a maximum, as compared 
with the silver solder at two dollars and fifty cents per 
pound in the manufacturing plant previously referred 
to. The question of stealing, therefore, could be al- 
most eliminated on first consideration because of the 
tremendous bulk involved; but in order to eliminate 
all question of doubt on this point a thorough investi- 
gation was promptly instituted, with the result that no 
leak through theft was found. The question then re- 
solved itself into an internal proposition rather than 
what might be called an external one. After an in- 
volved examination it was found that the loss actually 
took place during the melting of the metals. That is, 
an actual loss of eight per cent was found to have 
taken place between the time at which a heat was begun 
and the time at which it was poured. 

For the benefit of those who are not familiar with 
the normal shrinkage which takes place in the melt- 
ing of brass it might be stated that the average is 
between two per cent and three per cent under stand- 



160 SHOP EXPENSE ANALYSIS 

ard conditions. But in the case mentioned it was 
found that an excess of air blast was being used, with 
the result that the metal flux was actually blown out 
into the air, resulting in a loss of metal corresponding 
to approximately five per cent in excess of the usual 
loss. In this case the batteries of these furnaces in 
operation represented an investment running into 
many thousands of dollars, but the losses incurred 
through their operation necessitated their prompt re- 
moval and the substitution of the pit-fire method of 
melting. 

This condition had been going on for five years, and 
when we stop to consider that an excess shrinkage of 
five per cent on a melt of 6,500,000 pounds per year 
represents 325,000 pounds of metal each year, or a 
loss, when figured at 20 cents per pound, of $65,000 for 
one year, or $325,000 for five years, the management 
could hardly be criticized for making radical changes. 

In the case just mentioned we again find material 
waste that was due to a lack of executive control. This 
case differs from the first one in that records were 
actually kept of the work of the foundry in all of its 
operations. In fact, a complete history was kept of the 
work of each particular furnace, showing the number 
of heats per day, the quantity of metal poured, the 
amount of coke used, the repairs and relining expense 
incurred by each furnace, and the labor charged 
against them. There was no lack of available data 
from which to make comparisons which would reflect 
this condition and very easily make possible an effi- 
cient means of control. Through some inexplicable 
reason, however, a comparison was never made which 
brought out this form of waste. 

Just why such a condition could go on from year 



WASTE IN MANTTFACTUEINa 161 

to year without the management becoming aware of 
its existence is something which no one but a psycholo- 
gist can explain. Experience in many plants under 
diversified conditions has shown, however, that often 
the lines of least resistance in exercising proper admin- 
istrative control over the various factors of produc- 
tion are overlooked, with the result that conditions 
such as those here mentioned are possible. The only 
explanation that the writer can give from his experi- 
ence has been that it is mainly due to the fact that the 
average factory manager is so lost in a mass of routine, 
and has his nose so close to the grindstone, that he does 
not get the proper perspective. 

Many other similar illustrations could be given. For 
example, in a paint factory a large factor of shrinkage 
was discovered in the form of leakage from barrels. 
In fact, this same condition has been found in a number 
of plants where fluid materials are used in large quan- 
tities and are kept in barrels, and where faucets are 
inserted for the drawing off of these liquids by the 
workmen. Sometimes faucets are found to have been 
left wide open by the workmen through carelessness, 
thereby incurring substantial losses. In the modern 
manufacturing plant where fluid materials are used in 
considerable volume, they are stored in tanks at a cen- 
tral distributing station and are drawn off at various 
places throughout the shop through attachments of a 
special nature which cannot be left open and which 
eliminate all loss through seepage. This method also 
eliminates the fire risk involved by the old method — 
an especially important element where inflammable ma- 
terials, such as naphtha, gasolene, and varnishes are 
used. 

The material waste factor in some lines of business 



162 SHOP EXPENSE ANALYSIS 

is not appreciable, while in others it is a serious prob- 
lem. For example, in the manufacture of jewelry 
waste occurs at nearly every stage of production. In 
the punch-press operations the punchings often be- 
come scattered or lost; at the workmen's benches 
screened drawers are used to catch the filings ; in pol- 
ishing, more of the precious metal is taken off in the 
form of fine powder; in fact the very air of the fac- 
tory is laden with gold and silver dust. The sweepings, 
which are sent to refiners from time to time, become 
a source of revenue of no mean proportion which 
should be credited to the factory. 

In citron and peel factories still another example of 
waste occurs. In producing candied citron the first 
stage of the process is the removal of the peel from the 
pulp; the peel is then squeezed out and is packed in 
tubs of syrup. In this bath the brine is displaced by 
the syrup, after which the citron is dried and the 
weight further increased by another coating of syrup. 
Although lemon and orange peels undergo much the 
same course of treatment, yet the amount of spoil- 
age is very much greater than in producing candied 
citron. And this factor of the excessive waste in the 
one over the other produced an error in the final cost, 
because of the fact that in figuring this final cost the 
citron, orange, and lemon products were all computed 
as being directly proportional to the original cost of 
the citrons, lemons, and oranges purchased. This rela- 
tion was not true when the excessive waste involved 
in the orange and lemon peel treatment was considered. 

In New York some fifty-five million cocoanuts are 
opened yearly. Twenty-five cents a hundred is paid 
for opening the nuts and washing the meat. In the 
production of shredded cocoanut, sugar, salt, and glyc- 



WASTE IN MANUFACTUEING 163 

erine are mixed with the meat of the nut to give it 
more flavor. The greater the quantities of these in- 
gredients used, the more will be the profit accruing to 
the manufacturer. The important point in this illus- 
tration, however, is that of the utilization of by-prod- 
ucts. The heat value of one ton of cocoanut shells is 
equal to that of one ton of coal. Therefore the power 
generating plant of such a factory should be charged 
and the factory itself credited with each ton of cocoa- 
nut shells so used for fuel purposes. Again, the bar- 
rels in which the sugar is received are worth 34 cents 
each, so that when they are used for packing purposes, 
as is usually the case, the factory should be credited 
for the number of barrels so used. In this way we see 
the by-product of one branch of manufacturing becom- 
ing the material for another. 

Rancid and decayed nuts are also another form of 
waste found in this line of production and proper rec- 
ords should therefore be kept in order to help in exer- 
cising control over this source of wasted profits. 

In worsted mills waste occurs almost at the start. 
Shrinkage takes place from the time the vendor weighs 
the yarn in a damp room until the time when it is bone 
dried. On dry, clear days this shrinkage loss in drying 
will be about six per cent of the weight, and on a rainy 
day eight per cent. In the dyeing process the yarn 
will first lose approximately three per cent of its own 
weight, and then gain weight because of the dyes used. 
This is especially true of black, blue, or brown dyed 
yarn. Another five per cent is wasted in dressing, 
weaving, and finishing, of which only about one-fifth 
of the original cost is redeemable. The extent of this 
loss is quite considerable when we appreciate the fact 
that the yam is worth approximately eighty cents a 



164 SHOP EXPENSE ANALYSIS 

pound. Still another waste is incurred because of holes, 
mispicks, and bad and uneven threads which cannot be 
repaired by the sewers. Samples used by salesmen or 
given away through other mediums by the mill are like- 
wise a source of loss, credit for which should be given 
to the mill and debit made as a part of the sales ex- 
pense. 

Losses incurred by stealing were so extensive in a 
plant engaged in the manufacture of gasolene engines 
that it was found at the end of one year that enough 
parts for 125 complete engines had disappeared. The 
importance of controlling these forms of material 
waste is evident. 

Of equal, if not greater importance than material 
waste is time waste. Time waste may be arbitrarily 
divided into two distinct classes : direct time waste and 
efficiency waste. Under the former we would place the 
time lost by the workmen while waiting for work to 
be assigned to them when paid on a straight day-work 
wage basis; the time lost in educating new workmen; 
the defective work and errors ; and the time waste in- 
curred where break-downs occur in the transmission 
system of the factory or where the power is cut oif 
while needed. 

Under "efficiency waste" would be charged the loss 
of time incurred where, through poor routing of jobs, a 
macliine has to be set up first for a certain operation, 
then broken down for a different operation and then 
set up again for an operation similar to the first one, 
etc., when by proper routing and scheduling the same 
kinds of operations could have been worked succes- 
sively by the same machine tool. Efficiency waste would 
also include the time lost by workmen in reporting the 
time of starting and finishing every job to which they 



WASTE IN MANUFACTURING 165 

are assigned to the time clerk of their department, or 
in stamping their time tickets at some centrally located 
time clock. The amount of time so wasted can readily 
be appreciated if we consider, for example, a small fac- 
tory of only 100 employees changing jobs on an aver- 
age of five times a day. The time consumed by the 
workman in going to the time clerk or time clock at 
the start and completion of each of these jobs would 
amount to at least 2 minutes for each job, making in 
all a total of 10 minutes per day lost by each workman. 
Extending this time loss for 100 workmen for a year of 
300 working days, we find that it amounts to 5,000 
hours, which if figured at a nominal rate of 25 cents per 
hour is equivalent to a direct loss of $1,250. This same 
ratio, when applied to plants employing thousands of 
operatives, increases this loss in correspondingly 
greater proportions. 

Still another form of waste coming under this classi- 
fication is that caused by a low production because of 
lack of incentive through the wage payment plan in 
force. Where workmen are paid at a straight rate per 
hour, with no inducement in the form of increased 
wages through bonuses or piece-work premiums for in- 
creased production, it necessarily follows that a shop 
run on this plan cannot show a daily output corre- 
sponding to that of the plant using one or another of 
the modern wage payment schemes. It is a matter of 
record that men paid at a straight rate per hour do not 
work, on an average, at more than 60 per cent of what 
would be their normal speed under an incentive wage 
scheme ; and so we find a medium of waste of vital im- 
portance to the management where the study of the 
wage question has not been considered in its true sig- 
nificance to ultimate costs. 



166 SHOP EXPENSE ANALYSIS 

Finally, under this classification of ** efficiency 
waste," we come to the question of motion studies. 
Taylor, who applied the principles of motion studies 
at the plant of the Midvale Steel Company a number 
of years ago, established certain laws relating to the 
speeds at which machines should be run for different 
classes of work in order to secure the maximum amount 
of production in a given period of time. Later he 
carried this analysis still further to a study of human 
motions, and conclusively proved that the output of al- 
most any machine could be increased by a systematic 
study of the motions of the workman operating that 
machine. By a system of instruction cards, which 
Taylor originated and which are now being followed 
in many of our manufacturing establishments, the 
workmen are suppHed with instructions as to the 
method which they are to pursue and the motions which 
they are to go through, so that the greatest possible 
amount of production may result from a minimum ex- 
penditure of effort. 

The work begun by Taylor at the Midvale Steel Com- 
pany and later expanded and perfected by him at the 
plant of the Tabor Manufacturing Company, laid the 
groundwork for the application of these principles in 
present-day manufacturing methods. That organized 
labor, harboring the impression that a standardization 
of human motions would tend to make workmen sim- 
ply automatons, has fought the introduction of mo- 
tion studies into our industrial scheme, has been short- 
sighted. The history of industrial development clearly 
shows that wherever greater perfection has been pos- 
sible, either through mechanical or other means, the 
then existing methods have been discarded for the 
more efficient ones. 



WASTE IN MAKUFACTUBIKG 167 

It seems therefore to be a foregone conclusion, in 
view of the fact that since the introduction of motion 
studies where the methods as advocated by Mr. Taylor 
have been correctly applied, and where increased pro- 
duction and corresponding increase in economy of 
manufacture has been made possible through the stand- 
ardization of human motions, that the opposition of 
organized labor will eventually have to give way, if 
simply for no other reason than that motion study 
makes possible a conservation of human energy in ex- 
actly the same manner as that which takes place where 
an automatic machine supplants the hand method of 
manufacture. 

Mr. W. R. Whitney, of the Naval Consulting Board, 
writing on the subject of "Modern Scientific Meth- 
ods," recently stated that "scientific management is 
substantially identical in its economic purpose and net 
results with the use of automatic machinery. Both 
aim to reduce the amount and fatigue of manual labor 
by increasing its efficiency ; and both result in decreas- 
ing the cost of production and raising the standard of 
living. Severe discipline, driving methods and un- 
fair bonuses are characteristics of individuals and not 
of the system. In fighting efficiency, labor is mistak- 
enly fighting its own best interests." 

That time waste can be eliminated by a standardiza- 
tion of operating motions has been conclusively proven 
in many cases. For example, at the plant of the Pack- 
ard Motor Car Company, employing over ten thousand 
operatives, seven-eighths of the machine workers and 
assemblers are working under the bonus or premium 
system of wage payment based on standards estab- 
lished by time and motion studies. At this plant the 
average premium at the time of this writing amounts to 



168 SHOP EXPENSE ANALYSIS 

25 per cent of the day wages whicli the workmen would 
have received had this system not been inaugurated. 
That is, the average has been increased 27 per cent and 
has resulted in increased output, increased working 
force due to the increased bonus obtainable, and a con- 
siderable shortening of the hours of labor. Mr. F. F. 
Beall, vice-president of the company, recently stated 
that the stop watch and time study method has saved 
the employees of his company many unnecessary move- 
ments, and has correspondingly reduced the physical 
and mental fatigue from that under the old day work 
wage rate method. 

Another concrete illustration of the results possible 
through motion studies was found in the plant of a 
paper-box manufacturing firm, who stated that after 
two and a half years of operation under this method 
the benefits derived by their employees were repre- 
sented by an average increase of 15 per cent in wages, 
a reduction of 10 per cent in working hours, and a feel- 
ing of greater confidence on the part of the workmen 
because the tasks set by means of a scientific study of 
their work were found to have been accurate. A recent 
test at this plant on machines producing 85 per cent 
of the output showed that the difference between the 
time allowed for 2,000 hours of work and the time actu- 
ally consumed on this work amount to less than three- 
quarters of an hour. The contention of opponents of 
motion studies has been that the individuality of the 
workman is lessened, if not entirely taken away from 
him. Experience to date, however, has shown that the 
reverse has actually taken place. 

That we have not as yet reached the point where we 
can feel reasonably assured that we have definitely 
established all of the laws of fatigue, and while we 



WASTE IN MANUFACTUBING 169 

should not be too hasty in accepting as established 
facts each and every hypothesis which is advanced by 
even the advocates of this method of industrial econ- 
omy, it would seem reasonable to accept as an estab- 
lished fact the laws laid down by Mr. Taylor. That 
scientific management embraces a much wider field than 
that of motion studies should not be forgotten. From 
the viewpoint of waste, however, we are vitally inter- 
ested in the standardization of human motions as a 
medium of eliminating, to a great extent, waste which 
existed under the old regime. 

Coming now to the third and last of the three main 
divisions of waste, let us now analyze the various kinds 
of waste which cannot be charged directly either to 
material or to time waste, and which we have classified 
as * ' miscellaneous waste. ' ' Wherever time or material 
waste occurs, a third or indirect form of waste is also 
incurred. For example, where material waste occurs 
because stock has had to be junked or disposed of by 
reason of obsolescence or overstocking, we find indirect 
forms of waste incurred through interest charges on 
the stock which has been so disposed of, through rent 
expense chargeable on the basis of the floor space which 
has been occupied by the stock, through insurance and 
taxes, through administrative and stock-room expense 
incurred during the time that the material has been 
stored, and through the depreciation of stock-room fix- 
tures, material conveyors, containers, etc., used in con- 
nection therewith ; all of which charges represent waste 
in exactly the same form as though they could have 
been individually allocated. Other illustrations of in- 
direct waste are those incurred through power waste, 
and through needless breakage of dies or other tools, 
because of carelessness on the part of the workmen 



170 SHOP EXPENSE ANALYSIS 

or because of lack of proper instructions as to their 
use from the management. 

From the foregoing analysis of some of the main 
elements of indirect waste it will be readily seen that 
they are of equal importance and worthy of just as 
careful diagnosis and study as those forms of waste 
which can be charged directly against material or time. 

It will be remembered that in the construction of a 
shop cost we find three elements represented by pro- 
ductive labor, raw material, and overhead expense. All 
forms of waste in their final analysis become part of 
the charges included in this third and most important 
element of costs known as ' ' overhead expense. " It is 
of paramount importance that the student of this ques- 
tion should thoroughly understand that there is no get- 
ting away from the losses incurred by either labor or 
material. These charges for waste will eventually find 
their way into and become a part of the overhead ex- 
pense; and as this expense is eventually segregated 
into labor expense and material expense, as explained 
in detail in an earlier chapter, and is charged back to 
productive labor or material directly in the final sum- 
mary of costs, it is of vital importance that the differ- 
ent forms of waste be curtailed at their source. 



Chapter XI 

GEAPHIC DETERMINATION OF COSTS 

T^HE proper control of manufacturing expense can 
"*■ be best attained through a comprehensive system 
of statistics which, when compiled at periodic intervals, 
will reflect the true condition either of the shop as a 
whole or of any part thereof. 

There is probably no better way of presenting these 
data than by the graphic method. By plotting the units 
of time, money, volume of output, etc., on cross-section 
paper, a much better comparison can be made than is 
possible where the information is contained in numer- 
ous typewritten reports embodying a mass of figures. 

From the standpoint of manufacturing expense 
analysis, probably the first of these charts should show 
a comparison of the shop payroll as segregated into 
productive and non-productive labor. By referring to 
Chart IX it will be noted that the average monthly 
payroll amounted to about $30,000, divided into ap- 
proximately $20,000 for productive labor and $10,000 
for non-productive labor. 

A closer examination of this chart will show in the 
month of January, for example, that with a productive 
labor payroll of $21,500, the non-productive labor for 
the same period was $10,000. In the month of March, 

171 




CHART IX. COMPARISON OF SHOP PAYROLL ANALYZED BY 
PRODUCTIVE AND NON-PRODUCTIVE LABOR 

172 



I6JXX> 



14.000 




10.000 



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(A 
< «poo 



O 7.000 

a 

6JD00 



epoo 



4jOOO 



3^000 



TPOO 



tooo 



n^ 



-^ 



,^^ 



2:^ 



'^^^%l^/ 



^^S<P/Prgd^ 






Pavccr. -^ \ 



^ 



!^,v^Z 



^&£p£ns, 



^V 



^K- 






\r 



\ 



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^ ^ < IJi § 
MOHTHS 



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O UJ 

r o 



MTFmaUt 



CHART X. GRAPHIC ANALYSIS OF NON-PRODUCTIVE LABOR 

INTO NON-PRODUCnVE EXPENSE LABOR AND PRODUCTIVE 

EXPENSE LABOR 

The three lower curves show a further analysis of pro- 
ductive expense labor by classes of work 
173 



174 SHOP EXPENSE ANALYSIS 

with the productive labor having dropped to $17,000, 
or a loss of $4,500 as compared with the month of 
January, we find the non-productive labor has dropped 
only $500 from what it was in the month of January. 

Again we find that at the end of the year for the 
month of December the productive labor was $20,000, 
or $1,500 less than in the month of January of the 
same year; and yet the non-productive labor has in- 
creased from $10,000 to $11,000 for the same period. 
This increase would tend to show carelessness in con- 
trolling the non-productive labor, which is part of the 
manufacturing expense. 

In discussing a very simple chart of this nature at 
the beginning of this chapter, the main purpose of the 
writer is to show how very distinctly these variations 
can be shown when the records are plotted in this 
manner; a further purpose is to establish a basis 
from which other curves can be drawn. 

Assuming, therefore, that if such a chart showed that 
the non-productive labor had increased while the pro- 
ductive labor decreased, a further analysis of the non- 
productive labor would be in order, the object being to 
allocate this non-productive labor in order to find out 
just what part of it was responsible for the increase. 

Chart X shows at the top of the sheet the total non- 
productive labor on a somewhat larger scale than on 
Chart IX. All non-productive labor can be divided into 
the purely non-productive expense labor and into what 
is called productive expense labor. The term non-pro- 
ductive expense labor is used to designate such labor 
as sweepers, cleaners, porters, clerks, etc. The term 
productive expense labor is used to denote labor which, 
while non-productive as far as directly increasing the 
value of the product is concerned, is nevertheless pro- 



GRAPHIC COST STATISTICS 175 

ductive in that it is applied in a productive capacity 
even if the product is after all purely an expense item. 

To illustrate this point more fully : power plant labor 
employed in generating power, millwright labor em- 
ployed in repairing and changing the mechanical trans- 
mission system of the shop, and house carpentering 
labor employed in putting up partitions, repairing 
benches and doing such other work as is required of 
them in the average factory, are types of labor herein 
denoted as productive expense labor as differing from 
the non-productive expense labor. Chart X, therefore, 
shows first the total non-productive labor as divided 
between non-productive expense labor and productive 
expense labor, and then further segregates this pro- 
ductive expense labor into the house carpenters' de- 
partment, millwrights' department, and power plant. 
It is not the intention of the writer to convey the im- 
pression that this includes all the classes of labor 
which might be called productive expense, but simply 
to show in a general way the method of segregation. 

Chart XI is plotted in much the same manner as 
Charts IX and X, with the exception that "pounds of 
merchandise" turned out by the shop from month to 
month is used as the basis of comparison. The total 
is then further segregated into the different classes of 
goods, as represented by Merchandise Classes A, B, 
C, D, and E on the chart. 

An examination of this chart will show, for example, 
that the greatest increase has been in class ''B" goods, 
which shows a constant increase from month to month, 
while other classes of goods are fluctuating quite widely 
or maintaining practically a uniform output. The value 
of such a chart is that by its use executive control 
may be centered either on those lines which are fall- 



"Mr 

260 
WO 
240 

■ 

820 
.700 
180 
160- 
140- 
f20- 
100- 
«0 
60 





M9NTH8 



M.T.FicKa 



CHART XI. COMPARISON OP WEIGHT OP SHOP OUTPUT BY 
CLASSES OF MERCHANDISE 



17« 



ispoof 




MOMTHS 



NTFiexe^ 



CHART XII. COMPARISON OF MERCHANDISE MANUFACTURED 

TO THE TOTAL OF THE SHOP OUTPUT 

The cost of merchandise manufactured is further analyzed into 

raw material, productive labor, and overhead expense 

177 



178 SHOP EXPENSE ANALYSIS 

ing off in production, or on others that may show too 
much of an increase — an increase which might possibly 
have a disastrous effect on other more remunerative 
classes of output. 

Chart XII is a comparison of the merchandise manu- 
factured to the total output of the shop. It should be 
remembered at this point that the cost of any article 
manufactured in the shop is made up of the raw ma- 
terial, productive labor and manufacturing expense 
chargeable thereto. The sum of these three would be 
the cost of the merchandise manufactured, but it would 
not reflect the cost of the merchandise when completely 
assembled and delivered by the shop to the warehouses 
or stock rooms of the company. This is due to the 
fact that in most manufacturing plants a certain num- 
ber of parts are purchased from outside sources and 
are assembled with the goods manufactured in the shop 
as part of the finished apparatus, or its equivalent. It 
is therefore necessary to show the amount of such piece 
parts used during any month in order to arrive at the 
total cost of the manufactured product. This can be 
shown quite clearly by plotting curves, similar to those 
shown on Chart XII, where we may find, first, a total 
of the merchandise manufactured by the shop during 
any month, and then, with the addition of piece parts 
used, the total cost of the shop output for the month 
under consideration. 

A detailed study of this form of analyzing costs 
will show that it has many good features from an ex- 
ecutive point of view ; as, for example, if the purpose 
of the management were eventually to manufacture 
every part used in the finished product, the progress 
made in this direction could be instantly seen on a 
chart of this kind. 



GRAPHIC COST STATISTICS 179 

Chart XIII shows in a very comprehensive manner, 
first, an analysis of the productive labor payroll be- 
tween day-work and piece-work labor respectively, and 
also a comparison of the equivalent number of pro- 
ductive employees as segregated by day-work and 
piece-work employees. The particular value of a du- 
plex chart of this kind lies in the fact that it will show 
at a glance the exact status of the labor situation, and 
is so arranged that abnormal conditions will be easily 
reflected. 

If we compare the month of April with the month 
of January, for example, a close study of Chart XIII- A 
will show that while the productive labor payroll has 
increased considerably for the month of April, the 
increase is due entirely to piece-work labor. Now, by 
referring to Chart XIII-B, it will be seen that the piece- 
work employees for the month of April were exactly 
the same as for the month of January. This would 
indicate on its face that the operatives on piece work 
were earning more in the month of April than in the 
month of January. In other words, it would show that 
the output per piece-work employee had increased con- 
siderably, indicating a very healthy condition. Ee- 
ferring again to Chart XIII- A, it will be seen that in 
the months of November and December the piece-work 
labor payroll has overlapped the day-work labor pay- 
roll to a considerable degree. Eeferring to Chart 
XIII-B, we find in these same months of November 
and December, that there were 25 fewer piece-work 
employees during each month than in the month of 
January, and that there were between 50 and 85 fewer 
day work employees than in the month of January. 
This would indicate on its face that while the total 
number of productive employees had dropped from 



40,000 



35.000 



30.000 



25.0001 




10.000 

5.00 



300 

2S0 

200 

ISO 

100 

50 





CH/^RT I3A 



CHART 



I3B 




.yf-^Z^.^St^ 



MONTHS 



HJ.eittreR 



chart xiii. 

(a) comparison of day-work and piece-work labor 

payroll to total productive wages 

(b) COMPARISON OF DAY-WORK AND PIECE-WORK EMPLOYEES 

TO TOTAL PRODUCTIVE EMPLOYEES 
180 



75P0C 

70000 
























65,000 

a. 












1 
















1 


N-S: 




/ 








^ 




O 55000 






i 




? 


V 

V 


r- 


/ 

/ 


\ 




50.000 
450 


\ 

\ 




/ 


\ 


.2fj 






'^J 




\ 

\ 


/ 
/ 


> 


_,— j| 
















\ 


f 


■400 
350 






















1 






















/ 


iOO 














-^ 


^ 




y 


r ■ 








Vff7//ye o/ 


-Oa 


^ 


^ 




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iT 




250 






\, 




/ 




y,/ct'' 


/ 


\ 




/ 


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150 
100 


> 


*^ 


ii^ 


N 


r 




\ 




/ 


\ 












■ 












\ 


■Sft 


















































a. a. 
< a 
s < 



3 3 

MONTHS 



N.f.FickCR 



CHART XIV. COMPARISON OF TOTAL "WORTH OF MERCHAN- 
DISE PRODUCED TO THE PRODUCT PER EMPLOYEE 



181 



182 SHOP EXPENSE ANALYSIS 

225 in January to 120 in December, the actual payroll 
of these employees had decreased very slightly, as 
shown by Chart XIII- A. 

The conclusion to be derived from a study of these 
curves is that a much greater output per employee has 
resulted because of the increase in piece-work labor; 
and hence a very healthy condition is reflected because 
of the increase in earnings of the majority of the em- 
ployees and also because of the benefit to the manage- 
ment through increased production. 

A chart of this kind when used by the management 
of a factory will show very clearly conditions just as 
they exist and also the progress that is being made 
either to improve or to remedy existing conditions. 
The chart that we have just analyzed indicates that 
the management in this case should encourage the fur- 
ther extension of piece-work labor instead of day-work 
labor, as it has been conclusively demonstrated in this 
factory that when the employees are put on piece work, 
not only do they improve their own earning power, 
but also they produce an increased efficiency with its 
corresponding saving to the factory as a whole. 

Chart XIV is a comparison of the merchandise pro- 
duced for different periods to the number of produc- 
tive employees required to do the producing. The unit 
of measurement in this case is "the production value 
per employee." This chart supplements Chart XIII, 
and shows the result of the extension of piece work 
during the latter part of the year in the factory under 
consideration. A study of the curve representing the 
** value of product per employee" will show how very 
marked was its increase. For example, in the month 
of January this ''product per employee" was less than 
$250; while at the end of the year, in the month of 



GRAPHIC COST STATISTICS 183 

December, the output had been increased to $425 per 
employee. 

It should be remembered, of course, that a chart of 
this kind is of value only when an approximately stand- 
ard line of manufacturing work is being done. It 
would not give a good basis of comparison under condi- 
tions where the value of the material used in manufac- 
turing advanced considerably in price, or where an 
entirely new line of work might be introduced. 

This latter condition may be illustrated by consid- 
ering a factory making cheap jewelry where the only 
precious metals used were employed just in plating. 
If the management of the factory, however, should 
suddenly decide to go into the manufacture of solid 
silver or solid gold trinkets, the *' value of the product 
per employee" would naturally increase very materi- 
ally; and hence a chart of this kind would not reflect 
the true condition for comparative purposes. While 
such a situation as this is entirely within the range of 
possibility, as a general rule, however, the chart which 
the writer has drawn up, or a similar one, should prove 
of real value from an administrative standpoint under 
the average manufacturing conditions. 

Chart XV is a comparison of the productive labor to 
the manufacturing expense for different periods. The 
red line on the upper set of curves indicates the ex- 
pense, and the black line the productive labor. By 
plotting the totals for these two elements of cost in 
this way, any abnormal increases or decreases in manu- 
facturing expense will be clearly reflected, and a cor- 
responding signal of danger indicated to the manage- 
ment. 

From the analysis of manufacturing expense in the 
preceding chapters, we have found that this expense is 





PER CENT OVERHEAD EXPENSE OF PRODUCTIVE LABOR 


too 


106 125 104 III 95 90 106 107 67 100 96 






























35PO0 


— 


























32^00 
30000 








cy 


ART 


J5A 












































Total Productive Labor 1 


\ 












25PO0 














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\ 




ji 


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V 




h 


A 




/ 


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2i5O0 
«> 

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15,000 
I2.S00 

IC^OOQ 








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pense 


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5.000 
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iLZ<Xn-><«>OCC 
MONTHS 


i 




N.TfjCK£/f 



CHART XV. 

(a) comparison of productive labor to manufacturing 

EXPENSE 

(b) analysis of manufacturing expense into expenses 
for power, rent, tool, administration, ma- 
terial, FIXED charges, AND IDLE LABOR 

184 



GRAPHIC COST STATISTICS 185 

made up of a certain number of sub-divisions which 
have clear-cut lines of distinction between them. For 
example, all manufacturing expense was segregated 
into shop administrative expense, rent expense, tool ex- 
pense, material expense, idle labor expense, and fixed 
charges, the latter term being used to designate de- 
preciation, insurance, and taxes. Knowing, then, that 
any abnormal increase in the total manufacturing ex- 
pense must be due to increases in some one or more 
of these sub-divisions, it becomes necessary, therefore, 
to allocate this expense according to these sub-di- 
visions, so that the necessary effort may be expended to 
control the expense of those divisions which may be re- 
sponsible for the total increase in the manufacturing 
expense for any period. 

This has been done on Chart XV as indicated by the 
curves marked (B), where the charges against the dif- 
ferent divisions of manufacturing expense have been 
plotted as separate curves, month by month. Refer- 
ring to the upper curves, marked (A), which represent 
the totals for manufacturing expense and productive 
labor, we find that in the month of January the manu- 
facturing expense was 100 per cent of the productive 
labor. In the month of March we find that the expense 
is practically equivalent to that of the month of Janu- 
ary, while the productive labor has fallen off consider- 
ably. In order, therefore, to find where an increase in 
expense, or its equivalent, has occurred, we refer to 
curves (B) for that month. Here we find a slight in- 
crease in power expense and material expense over the 
month of January; and we also find that other divi- 
sions, such as tool expense and idle labor expense, have 
not decreased proportionately to the decrease in the 
productive labor. Again, in the month of April we find 



186 SHOP EXPENSE ANALYSIS 

that while the productive labor has increased consider- 
ably over that in the month of January, the manufac- 
turing expense, which should have been less or at least 
not more than 100 per cent of the productive labor for 
that period, has increased to 104 per cent. This in- 
crease is very easily discovered by referring to the 
analysis shown by (B), which indicates that there is a 
decided peak in tool expense. This might possibly be 
due to excessive repairs to machinery or to tools dur- 
ing that month, or possibly to damage to the machine 
or tool equipment in some way or other. Whatever 
the cause may be, however, is a matter of simple 
analysis of the charges made to the one or more divi- 
sions of expense showing an increase. The responsibil- 
ity for such increases, therefore, can be placed by a 
simple set of curves plotted in this manner. 

Still another advantage of this method of expense 
analysis is that of reflecting increases in some one or 
more of these different classes of expense, even when 
the total manufacturing expense for that period is 
well within normal limits. This is forcibly illustrated 
by examining the month of July, where we find the total 
manufacturing expense to be only 90 per cent of the 
productive labor, and where, if an analysis were not 
made in the manner here outlined or in some other 
similar way, the management would naturally feel sat- 
isfied that the manufacturing expense was being kept 
within the required limits. An examination of Chart 
XV-B, however, will show that a very decided increase 
in material expense occurred in the month of July, due 
probably to a large amount of defective work. With 
this indication of something wrong, the proper means 
can be applied to remedy the situation, and the ex- 
pense may be even further reduced to its proper level. 



GBAPHIC COST STATISTICS 187 

Chart XVI is a companion chart to Chart XV. The 
difference between the two is simply one of construc- 
tion. Chart XVI is called a constructive graphic 
analysis and differs from Chart XV in that each set of 
curves is plotted by using the point of the curve pre- 
ceding it for that month as the zero point instead of 
having these curves overlap each other as in Chart 
XV-B. The method of constructing these curves is to 
plot from the zero line any one of the divisions of 
manufacturing expense. In this case tool expense was 
first plotted; after which the curve for fixed charges 
was then plotted by using the tool expense curve as a 
starting point for each month. In the same way power 
expense was plotted by using the fixed charges curve as 
a starting or zero point in each month. Administra- 
tive expense, rent expense, idle labor expense, and ma- 
terial expense were also plotted in like manner ; and in 
this way the top curve is indicative of the total manu- 
facturing expense for any period. A productive labor 
curve has also been plotted in black on this chart, so as 
to show how these two total curves coincide with the 
curves shown on Chart XV-A. It will be noted that 
none of the expense curves overlap as they do in Chart 
XV-B ; and the space between the curves is indicative 
of the charges against the various divisions of expense, 
rather than the peaks as in Chart XV-B. Each square 
designates $2,500, which is exactly the same basis as 
that used in Chart XV. 

This method of constructive graphic analysis is espe- 
cially valuable where a large number of curves have to 
be drawn, and where they would not be easily distin- 
guishable if they were all plotted from the same zero 
point, as in Chart XV-B. Where only a few curves 
are employed, however, the writer believes that the 





■ 


35.000 
52.500 
30.000 
27.500 
25.000 
22.500 












































































































^''7 


\ 




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\ 










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/ 


f/ 


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A 




< 20.000 


\ 


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ibori 


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g 17,500 


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1 5.000 

12^500 

10.000 

7,500 

5,000 




/ 


/^ 


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v\ 


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> 


/ 




FEB 
MAR 
APR. 
MAY 
JUNE 
JULY 
AUG. 
SEPT 
OCT. 
NOV. 


i 

J 
^ 


MONTHS 


nzFicKEK. 



CHABT XVI. CONSTRUCTIVE GRAPHIC ANALYSIS OF MANU- 
FACTURING EXPENSE 
Each successive expense line is plotted by using the preceding 
expense point for that month as zero 

Red Imes denote expense items. Black lines denote productive 
labor 

188 




CHART XVn. DEPARTMENTAL COMPARISON OF OVERHBAD 
EXPENSE TO PRODUCTIVE LABOR AT THE SAME PERIODS 

Red lines denote overhead. Black lines denote productive labor 

189 



190 SHOP EXPENSE ANALYSIS 

constructive method, as indicated by Chart XVI, does 
not reflect variations quite so clearly as when these 
curves are plotted as in Chart XV-B. The constructive 
method is employed by a large number of manufactur- 
ing concerns, however, who have found it especially 
valuable in their analysis work. 

Chart XVII shows a further analysis of the produc- 
tive labor and manufacturing expense by departments 
of the shop, and is used as a supplementary analysis 
of the figures indicated by Charts XV and XVI. Any 
abnormal variations in expense or productive labor 
will be very apparent from an inspection of curves 
drawn in this way. For example: Under approxi- 
mately normal working conditions, a decrease in the 
amount of productive labor should show a descending 
curve in the manufacturing expense for that period. If 
this expense should remain stationary or even possibly 
show an increase, it would immediately be a signal for , 
investigation. 

It is a comparatively simple matter to inaugurate 
the necessary means for controlling abnormal condi- 
tions when they are once indicated. In order to do 
this, however, it is necessary to know when and where 
the causes of trouble have occurred; and, therefore, 
the greater the extent to which analysis of the kind 
here indicated can be carried, the greater will be the 
corresponding value resulting from the exercising of 
proper control over these leakages of profit. 

Chart XVIII is known as the ''Current Variation 
Chart" and is used to indicate the amount of allow- 
able monthly manufacturing expense for different de- 
grees of shop activity. Chart IV, in Chapter VIII, 
somewhat similar to the one here shown, was drawn 
to establish the fact that the manufacturing expense 



GRAPHIC COST STATISTICS 191 

increased proportionately as the activity of the shop 
decreased below normal activity. This was due, as 
there explained, to the fact that a considerable por- 
tion of the manufacturing expense was made up of 
what the writer called "constant expense," which did 
not decrease even when the shop was operating at 
the very lowest point. This was due to such constant 
charges as rent, depreciation, insurance, taxes, and up- 
keep expense, which had to be carried on even if the 
plant employed only one man. The principle estab- 
lished by Chart IV was that as the activity of the shop 
fell below normal, the costs of production increased 
because of the fact that they had to absorb all of the 
constant expense which had previously been spread 
over a larger output. In Chart XVIII this constant 
expense is indicated by the line B-B', which shows that 
the monthly constant expense is $10,000. The variable 
expense, which is made up of all expenses other than 
constant shop expenses, is the difference between the 
constant expense and the allowable monthly manufac- 
turing expense for any period. This variable expense, 
as will be seen, increases in direct proportion to the 
increase in activity of the shop. 

A careful study of the relation of these two curves 
will show that of the total manufacturing expense in- 
curred for any month, there is only a certain portion 
thereof which can be controlled by the factory manage- 
ment. This controllable expense is what has herein 
been denoted as variable expense. It is unnecessary 
at this point to enter into a discussion of the recom- 
mendation made in Chapter VIII, that the shop or- 
ganization should be charged with only that proportion 
of the constant expense which the current activity 
bears to the normal activity; but the intention, how- 



35.000 

52500 

30.000 

17.500 

25.000 

a 22^00 
g 21,500 

J 2QO00 
£ 17.500 

g 15.000 

a 
a 

12,500 






































j 












: / 












J. 










/ 




















> 


f 




















/ 




















J 


^ 




A 


Normal 


B' 










i 






















A 










<Var 
tro 


iable 
liable 


or Con- St 


•S 






'•<Co, 
cor 


TStan 
trvlla 


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bteZt 






> 


f 








17- 

pense) 






y 


f 


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^ 






7.500 

5P00 

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if 






















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^ o o o o o o o o SOS 

OOOOOQOOQqC 
to Q lO O. lO O. U) Q •« 5 J 
M M> r-.- O CvT lO K O ^ Iff 

OVERHEAD EXPENSE. DOLLARS 

N.TFiCH 


t 

w 



CHART XVIII. CURRENT VARIATION CHART 

Assume the normal yearly productive labor is $258,000, and the 
normal yearly overhead expense is $258,000, or 100 per cent; then the 
normal monthly productive labor and overhead is $21,500 each. 
Assume also that the constant expense is $120,000 yearly, or $10,000 
monthly; then the normal monthly variable expense will be $11,500; 
and,j[therefore, for every dollar of productive labor incurred monthly, 
there will be $0,535 variable expense incurred. Hence, the current 
expense for any month will equal 0.535(x) + $10,000, in which 
(x) represents current productive labor. 

Productive labor is used in this chart as indicative of shop activity. 
To be theoretically correct, "productive hours" should be used 
instead of "productive labor" 

192 




CHART XIX. 

Above: Comparison of actual overhead expense to allowable expense 
for different degrees of shop activity. (Activity is here represented by 
productive labor) 

Below: Comparison of actual variable or controllable expense with 
variable expense allowable by Chart XVIII 

193 



194 SHOP EXPENSE ANALYSIS 

ever, is to illustrate forcibly the fact that it is not pos- 
sible for the shop administration to reduce expenses 
beyond a certain point, this point being the total for 
constant expense. 

Chart XIX is composed of two sets of curves. The 
lower set, A, is made up of three separate curves, one 
of which is a straight line and represents the constant 
expense referred to in the preceding paragraph. The 
other solid red line is drawn to indicate the difference 
between the total manufacturing expense for any 
month and the constant expense for the same month, 
or in other words, it shows the controllable variable 
expense. 

In this way the total manufacturing expense, as in- 
dicated by the solid red line in the upper set of curves, 
B, is split up each month between constant and all 
other manufacturing expense charges. This is done 
in order to indicate to the management the amount 
of manufacturing expense which they could actually 
control at any time. Using ''productive labor," 
charted in black, as a measurement of shop activity, 
and referring again to Chart XVIII, it will be seen 
that for the amount of productive labor shown for 
any month a corresponding allowable manufacturing 
or overhead expense for that degree of activity is 
established. For example : In the month of January, 
when the productive labor of the shop was $21,500, the 
shop was running at normal, as indicated by the line 
A-0 on Chart XVIII. It will also be seen that the 
manufacturing expense for the month of January was 
also $21,500 and agreed with the normal expense in- 
dicated by the line 0-F. Therefore, by referring again 
to Chart XIX-B, it will be found that in the month of 
January the manufacturing expense and the produo- 



GRAPHIC COST STATISTICS 195 

tive labor coincided. In the month of February, how- 
ever, the productive labor had dropped to $17,750, and 
the manufacturing expense had dropped to $18,750, as 
indicated by the solid red line in this chart. In order 
to ascertain, therefore, whether or not this manufac- 
turing expense was well within the allowable limits, we 
turn back again to Chart XVIII, which shows that for 
a shop activity represented by $17,750, the allowable 
expense is $19,506; so that the actual manufacturing 
expense which has been incurred for the month of Feb- 
ruary is $750 less than that allowed by Chart XVIII. 
In other words, it reflects efficient shop management. 

In the month of April, however, we find that the pro- 
ductive labor of the shop has increased to $24,000, and 
that the manufacturing expense has jumped to $25,000. 
Following the same procedure, we find from Chart 
XVIII that for a shop activity represented by a pro- 
ductive labor of $24,000, the manufacturing expense 
should have been only $22,840. In other words, the 
manufacturing expense for the month of April is $2,160 
in excess of what it should be. The dotted red line in 
Chart XIX-A indicates this allowable variable expense 
for any month as compared with the total variable ex- 
pense incurred during that period. 

It is of paramount importance to understand this 
principle of constant and fluctuating expenses of the 
shop thoroughly; and also to realize that there is a 
relation more or less fixed between the activity of the 
shop and the amount of expense which it is permissible 
to incur for any period of activity. The curves which 
the writer has brought out in Chart XIX are original 
so far as he is aware. He has been forced of neces- 
sity at various times to allocate manufacturing ex- 
pense in such a way as to demonstrate conclusively to 





















































































3 rand Tofal Square Feet oFFIoor'Space 
































Unoc 


cupied Sp 


ace 


































/ 




^ 


A 




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\, 


y 







/ 












s 


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Sq.Ft 


























^^" 




Miscellaneous Sfoce 








~ 








\ ' 


I 
















office Space' 
1 1 










a 
• 


MONTHS 

HT.Fia 


> 

i 



CHART XX. MONTHLY COMPARISON OF ACTUAL EFFECTIVE 
SQUARE FEET OF FLOOR SPACE, OCCUPIED AND UNOCCUPIED 



196 



GRAPHIC COST STATISTICS 197 

those in charge of various manufacturing enterprises 
the extent of their responsibility. In order to do this 
it was first necessary to separate the constant expense 
from the controllable expense, and then, through the 
Current Variation Chart XVIII (which, of course, is 
based on the establishment of normals in each factory), 
to show the relation between the controllable expense 
which has actually been incurred and the permissible 
expense. 

The great fault which the writer finds with those in 
charge of factory plants is that they do not appreciate 
the fact that a relation of this kind can be established 
for their shops, and that it will serve as a splendid 
guide to them in exercising administrative control. The 
principle here laid down is not difficult of compre- 
hension by a man of average ability ; and after it has 
once been thoroughly understood, it should be of much 
value in maintaining uniform costs of production, even 
when periods of depression set in. This reference to 
uniform costs is based on the principle, of course, that 
the shop management will be charged with only that 
portion of the constant expense which is employed by 
it in actual production. The equation for this constant 
expense will be found in Chapter VIII. 

Chart XX is more or less self-explanatory. Its value 
is in bringing forcibly to the attention of the manage- 
ment the actual space employed in production. Often 
a rearrangement of occupied areas will show that ad- 
ditional space may be made available for manufactur- 
ing purposes. Excess space is a burden on the shop ; 
it increases the cost of the manufactured product, and 
is rarely an asset of offsetting value. The necessary 
steps, therefore, should be taken, when consistent with 
future policies, to dispose of this excess burden. 



Chapter XII 
STANDARD REPORTS 

WHILE the writer has tried to show in a general 
way in the preceding chapter some of the benefits 
to be derived from an executive viewpoint through a 
graphic presentation of manufacturing statistics, there 
are, nevertheless, certain other data which, mainly be- 
cause of the volume of detail necessary, cannot be 
shown in any other way than by the standard report 
method. In this chapter the writer will therefore en- 
deavor to show some of the methods of compiling sta- 
tistics of a manufacturing company ; and will endeavor 
to use, wherever possible, actual reports made by man- 
ufacturing companies. It is not the intention to have 
the reports contained in this chapter related to each 
other. The main purpose is to show the general 
method of assembling certain information required by 
plant executives. While the figures shown on some of 
these reports actually do relate to others, this does not 
hold true for all ; and the reader is asked, therefore, to 
keep this point in mind when analyzing any of the 
figures shown herein. 

Report No. 1 contains information showing the orig- 
inal and net values of the factory plant and its equip- 
ment, together with the depreciation reserves which 
have been set aside for replacement, and the extent 

198 



BTANDAED BBP0BT8 199 

of these amounts for depreciation applicable to the 
various parts of the plant and its equipment. We see 
here a plant whose buildings have been divided into 
eight separate sections, numbered from A to H inclu- 
sive, and with the values of the two smoke stacks shown 
separately. We also find the original face values of 
grounds, permanent fixtures, machinery, small tools, 
patterns, and shop fixtures indicated, making in all a 
total for this factory plant of $4,468,999.81. Against 
these original face values we find that a depreciation 
reserve of $2,615,865.63 has already been set aside ; or 
in other words, the plant as a whole has been depre- 
ciated 56.29 per cent up to the time when this report 
was compiled. 

The changes in face values made during the year 
1916 naturally caused proportionate changes in the ac- 
crued depreciation reserve set aside during the course 
of the year, and in like manner changed the net values 
as carried forward from the preceding year. These 
changes were due to new plant or equipment which was 
made or purchased, sold or transferred, destroyed or 
written off entirely as worthless during the year. Re- 
port No. 1-A, which is a supplement to Report No. 1, 
shows this information in detail according to the re- 
spective plant accounts, and will be found to check up 
as far as the figures are concerned with those shown 
on Report No. 1. 

Report No. 2 shows the shop output and deliveries 
for the fiscal years 1915 and 1916 by classes of mer- 
chandise manufactured. By reading this report from 
the right to the left, it will be seen that the column 
headed "Total Output" is the total of the three col- 
umns headed "Productive Labor," "Material," and 
' ' Labor and Material Expense ' ' respectively. To this 



200 



SHOP EXPENSE ANALYSIS 






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STANDARD EEPORTS 



201 






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total output has then been 
added the piece parts used 
during the year, these piece 
parts being parts made by 
the company in preceding 
years and carried in stock, 
or possibly piece parts pur- 
chased from other manufac- 
turers and used in the as- 
sembling of the finished 
product of the shop. The 
total of these two columns, 
"Total Output" and ''Piece 
Parts Used,'* represents the 
total deliveries of the shop 
for the fiscal year. The term 
"Total Deliveries" as here 
used represents the total 
cost of all work performed 
during the year, and includes 
the cost of unfinished work 
in the shop at the end of the 
year. 

A study of this report will 
show that the manufactured 
product is first classified ac- 
cording to certain kinds of 
goods manufactured by the 
company, to which are then 
added "Other Merchandise" 
and "Plant and Expense 
Goods Manufactured," re- 
spectively. Plant and Ex- 
pense Goods refers to the 



202 



SHOP EXPENSE ANALYSIS 



O 



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271,279.41 

226.640.36 

240.137.78 

19,826.71 

20,169.22 

215,305.76 

22,555.18 

10,234.32 

21,303.01 




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Net Change 

in Face 

Values in 

1916 




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(a) or horn (b) 

Other Ledger 

Accounts 




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STANDARD BEPOBTS 



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204 SHOP EXPENSE ANALYSIS 

work performed in the shop during the course of the 
year for the use of the shop itself in the form of parts 
necessary for repairs to its own equipment, etc. 

Report No. 2-A is a supplement to Report No. 2 in 
that it shows the deliveries made by the shop during 
the year as divided between Work in Process, Piece 
Parts Completed, Special Apparatus, and Plant Ex- 
pense items. The totals against each of these divisions 
are naturally assessable against different accounts ; for 
it will readily be seen that it would not be good policy 
to credit all work whether completed or not into the 
same accounts. A careful analysis and study of this 
report will show, in the first place, the cost of the Work 
in Process as segregated according to Labor, Labor 
Expense, Material and Material Expense, shown by 
the columns so headed. For example, we find Work 
in Process, Account No. 30, debited with $2,522,449.15 ; 
Shop Deliveries Account credited with $1,093,968.34; 
and Shop Piece Parts Account credited with $1,428,- 
480.81, the debits balancing with the credits, these parts 
being used thus far in the work in process. These fig- 
ures represent the cost of work in process at the end 
of the fiscal year. In like manner. Finished Merchan- 
dise Account No. 45 is debited with $2,146,612.04; Shop 
Deliveries Account is credited with $964,087.11; and 
Shop Piece Parts Account credited with $1,182,524.93. 
This same method is followed for the Special Appa- 
ratus Account and the Plant and Expense Goods Manu- 
factured, and also for the total shown for special work 
done for annexed plants. It will be found that the 
grand totals for all of the columns shown on this re- 
port and marked (a) agree with the total Shop De- 
liveries for the year 1916 as shown on the next to the 
last row of Report No. 2, also marked (a). 



Report No. 2-A 

JOHN JONES MFG. CO., Inc. 

Summary or Regular Shop Transfers 

For Fiscal Year Ending November 30, 1916 



The amounts in the column headed 
Total Deliveries are debited the fol- 


terial 
Load 

Cent 


Shop D.-livcri™ Credited 


40 Shop 
Piece Parts 
Credited 




lowing accounta. 


Labor 




Material Ex- 
pense Loading 


Total 


„ Total 


Sec. 
No. 


Class 


N..e 


LahorExpense 
Loadiog 


Material 




30 


002 
003 

005 
006 

008 
009 
010 

on 

012 

013 
014 

016 
017 
018 
019 
020 
021 

000 

001 

150 
190 
200 

400 
435 

450 
476 

555 

001 

250 
476 

555 
2-8 
2-8 


GeDcral Equipment. , . 
Automobile Equipmeut 

Lioe Apparatus 

Insulated Cable 

Power Mnchinerj- 


12-- 
12^ 

12}^ 
12H 

!itl 

12H 

12« 

1214 
12M 

mi 

12H 

12)4 
I2H 

12)4 
12« 

12)4 
12H 

im 

12H 
12)4 
7 

mi 

12)4 
12)4 


$115,087.87 

104.060,08 

8.752.32 

966.68 

317-47 

1.89 

40.42 

1,783;24 

1.87 

10.640. 02 

16.522 .'35 

59:07 
5.20 
18.27 
29.45 
60.73 
4.25 
48.84 
13.43 
377.98 


$101,687.78 

187,233-02 

6,704-74 

230:40 
4.50 
22-42 

1,598:86 
2.128.56 

18,269.45 
8.26 
65.13 
1.75 
27.04 
12.79 
37.39 

33:53 

8.13 

170.86 


$40,752 63 

241.372 82 

7.219,90 

259.14 

21.83 

:ii 

110.99 

104:74 
3,740.68 

5.305,26 
22-17 


$9,527,49 

75,206,49 

2.537.01 

85,64 

5.47 

29:53 

127.13 

3.266.04 

1,504.51 

845.77 
2.78 


$267,055,77 

667.872,41 

25.213.97 

1.743.72 

6:53 

62.97 

262,72 

3.981,36 

5,550.21 

26.878.93 

39.932,83 
60-07 
124.20 
86,54 
2,689.82 
42.24 
96.51 
8.52 
147.30 

51:096:43 


$447,404.66 

917.928.61 

24.932.20 

106 18 

288.60 

43:93 

128-02 

1.194.45 

24!006:90 

7.924.75 


$714,400.43 

1,685.801.05 

50.146.17 

1,849.90 

863.07 

7,03 

106.90 

390.74 

5.175.81 

10.011,59 

49.945,83 

47.857 .58 
50.07 










Pro- 


Other SupplLea 

Insulated Wire 

TelcKraph Apparatus. .. 
Miniature Lamps and 




Battery Supplies 

Fuses 

Elec. Lt, Supplies 

Electric Light FiirturcB. 

Fan Motor Parts 

Electric Novelties 




2,543:13 








1.38 














6.96 

.68 

61,58 

1,561.58 

49.891,60 


:o4 

3.36 
655:99 






















Bulbs 








.10 


61,096.63 




Total 

Plant and Expense Goods 

Manufactured 

General Equipment . . . 
Automobile Equipment 

Lme Apparatus 

Insulated Cable 

Power Machinery 




$317,876.38 


$328,699.25 


$353,596.54 


$93,796.17 


$1,093,908.34 


$1,428,480.81 


$2,522,449.15 


i 


$4,568.36 

94,254.80 

189.604.04 

3,445.13 

300.03 

186.93 

.60 

18.44 

349.93 

3.029.06 

9.641.80 

3,228.91 
1,556-35 


$3,248.07 

63,641.67 

133.160.30 

2,776.23 

91:71 

.35 

• 21.42 

253,84 

5.383,20 

7,241.10 

2.841,33 
1,311.03 


$1,370,67 
60,897,91 
233,486,86 
11,588,65 
172 39 
38,28 


$127.82 
7,414.58 
29.167.66 
1,420.21 
63.89 
4.82 


$9,314.92 

226.209,05 

586.408.76 

19,230.22 

701.56 

271.74 

.95 

103.02 

834.95 

81.345.78 

27.159.57 

8,847.57 
4.659.02 


$131.43 
311.481.82 
837.028.39 

166:78 


$9,446.35 

537,690.87 

1,422,437.15 

31,113.09 

438:52 




205:44 
08,172,12 
0,136,01 

2,607,13 


25:74 
4,761.40 
1,140.66 

170.20 
199.02 






1 


Other Supplies 

Inaulateti Wire 

Telegraph Apparatus . . - 
Miniature Lamps and 

Accessories 

Contract Work 

Total Finished Mdse . . . 

General Equipment . . . 
Automobile Elquipment . 

Power Machinery 

Miniature Lamps and 


276.39 
2,324.41 
16,842.85 

2,341 80 
12-29 


1,111.34 
83,670.19 
44.002.42 

11.169.37 




$310,134.47 


$220,135.50 


$389,324,23 


$44,492-91 


$964,087.11 


$1,182,524-93 


$2,146,612,04 


60 

1 


$11,984.11 
10.75 
62.04 

34.38 
6.940 07 


$12,787.22 
20.45 
49.53 

82,26 
7,338.45 


$2,159 24 

ris 

.62 
4,223.81 


$3,038,35 
.21 
2.26 

.97 
3.738.37 


$29,968.92 
31,56 
115,00 

118-23 
22,240.70 


$78,369-71 
137:31 


$108,328-63 
31-87 
252.31 


S 


Contract Work 

Total Shop Apparatus 

Total Plant and Ex- 
pense Goods Mfrd. 

Total Main Plant .. 
Total Annexed Plants 

Grand Total 


4,017.74 


26.268.44 


S. 


7 


$19,031.35 


$20,277.91 


$6,385.00 


$6,780.15 


$.52,474 41 


$82,515 07 


$134,989.48 


^ 


$179,624.84 


$47,104.52 


$43,524 62 


$3,074,99 


$273,228-97 


$9,752.79 


$282,981.76 


1 


$826,567 04 
$24,311 79 


$616,217,18 
$47,117.27 


$702.8.30-39 
$353,774 80 


$148,144.22 
$10,174.44 


$2,383,758.83 
$435,378-30 


$2,703,273,60 
$42,735.60 


$5,087,032.43 
$478,113.80 




$850,878. 83a 


$663.334. 45a 


$1,146,605, 19a 


$158.318, 66a 


$2.819.137. 13a 


$2.746,009. 10a 


5,565,146. 23a 



STANDABD BEPORTS 205 

This method of analyzing work done in the shop 
according to classes of merchandise and also by work 
in process, finished goods, etc., makes possible a very 
comprehensive idea of the work as a whole or any part 
thereof. It must be remembered, however, that the 
shop costs, as figured and shown on this Shop Delivery 
Eeport No. 2-A, were based on pre-determined manu- 
facturing expense loading rates, and that while these 
figures represent the total for goods manufactured as 
figured on this basis they will in all probability have 
to be adjusted to conform to the exact totals for pro- 
ductive labor, raw material, and manufacturing ex- 
pense applied to manufacturing during the course of 
the fiscal year. By referring back to Chapter VIII 
it will be seen that the manufacturing expense in- 
creases in a certain ratio when the shop is working 
below normal, and in like manner it decreases when 
the activity of the shop is above normal. Because it 
is often impossible to determine true conditions which 
will exist in advance, it is necessary therefore, in order 
to have all shop costs comparative during the year, to 
use a standard expense loading as based on normal 
conditions and as indicated in Chapter VIII on the 
Current Variation Chart by the ** standard machine 
unit" line. In this analysis of manufacturing ex- 
pense, we find that the reason for this increase in ex- 
pense when the activity of the shop was below normal 
was due to the necessary absorption of the constant or 
fixed expense by a smaller output. It stands to rea- 
son, therefore, that if the activity of the shop for the 
fiscal year 1916, during which the costs as shown by 
Report No. 2-A were compiled, was below normal, an 
adjustment will have to be made adding to these stand- 
ard costs a sufficient amount to make the total for man- 



206 



SHOP EXPENSE ANALYSIS 



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STANDABD BBPOBTS 207 

ufacturing expense eqnal to the actual amount in- 
curred during the year. This amount is called the 
"current variation" addition. 

Eeport No. 3 shows the method pursued in correct- 
ing these current costs, as shown by column ''a," so 
that they will agree with the totals for labor, material, 
and manufacturing expense applied in production dur- 
ing the year. Column ''b" shows these costs as cor- 
rected to agree with these figures ; and also takes care 
of the depreciation on inventory, thereby arriving at 
the total adjustment to be made to the Merchandise 
account. 

Report No. 4 is a general balance sheet in which the 
assets and liabilities of the manufacturing department 
of the company are shown separately from the other 
branches. While the ordinary balance sheet is used by 
practically all concerns, the method of segregating the 
manufacturing department, as in this report, has prob- 
ably some advantages over that commonly used 
wherein all figures are shown as one total. It is un- 
necessary, however, to lay any great stress on this par- 
ticular point, as the rest of the report is more or less 
self-explanatory. 

Report No. 5 summarizes the cost of taking the an- 
nual inventory and making up the annual reports per- 
taining to the year's business. An examination of 
this report will show that the total expense is divided 
between the direct expense incurred in doing the physi- 
cal work necessary and the supervision thereof. It is 
perhaps worth while to call attention on this report 
to the small amount of expense incurred in taking the 
machine inventory, which, it will be seen, amounts to 
only $8.15, including supervision. This is directly due 
to the fact that a perpetual inventory was kept at all 



208 



SHOP EXPENSE ANALYSIS 



Report No. 4 
JOHN JONES MFG. CO., Inc. 

General and Manufacturing Departments 

Summary of Balance Sheets, December 1, 1915, and 

December 1, 1916 





Total 
1915 


Total 
1916 


Manufac- 
turing De- 
partment 


Other 
Than Manu- 
facturing 
Department 


Assets 
Factory Plant: 


$478,966 
1,457,826 
673,172 
925,193 
817,183 
37,840 
198,457 


$478,965.92 
1,414,694.44 
748,380.26 
851,301.09 
747,742.72 
36,913.06 
191,002.32 


$478,965.92 
1,414,694.44 
748,380.26 
851,301.09 
747,742.72 
36,913.06 
191,002.32 




Buildings 










Small Tools 
















Total Factory Plant 


$4,588,637 


$4,468,999.81 


$4,468,999.81 








"Warehotises and Offices: 


$422 

9,898 

49,915 










$10,106.43 
57,328.87 




$10,106.43 






57.328.87 








Total Warehouses and Of- 


$60,235 


$67,435.30 




$67,435.30 








Merchandise: 

General Mdse (Co Mfr ) 


' $14,683 
1,601,818 


$566,357.28 

391,402.94 

7,871.50 

962,459.99 




$566,357.28 


General Mdse (Not Co. Mfr.) 




391,402.94 






7.871.50 




$962,459.99 








Total Merchandise 

Cash 


$1,615,901 

$206,507 
412,203 


$1,928,091.71 

$177,653.51 

279.896.29 

1.524.64 

81.061.83 


$962,469-99 
■ ■$1S.258!46 


$965,631.72 
$177,653.51 




264,637.89 




1.524.64 






81.061.83 








Grand Total 


$6,059,078 


$7,004,663.09 


$5,446,718.20 


$1,557,944.89 






Liabilities 
John Jones Mfg. Co., Inc 


$2,693,340 


$3,990,361.08 


$2,734,720.88 


$1,255,640.20 


Reserve for Damage Suits 

Depreciation on: 


2,597,879 
59,959 


1,500.00 

2.615,865.63 

67,435.30 

81.061.83 

1,524.64 


1.500.00 
2,615.865.63 








67.435.30 






81.061.83 








1.524.64 








Total Depreciation 


$2,657,838 


$2,765,887.40 


$2,615,865.63 


$150,021.77 




$201,000 

500,000 

6,900 


$246,914.61 


$94,631.69 


$152,282.92 






Accounts Payable, Deposits . . . . 














Grand Total 


$6,059,078 


$7,004,663.09 


$5,446,718.20 


$1,567,944.89 







STANDABD REPORTS 



209 



Report No. 5 

JOHN JONES MFG. CO., Inc. 

Statement of Cost of Taking Inventory and Making up Reports 

Required by Secretary at End of Year 



Cost of Store Merchandise Inventory: 

Salaries in Stock Rooms 

Receiving Department . . 
Shipping Department . . . 
Clerical Departments . . . 
Purchasing Departments 



Total. 



Cost of Shop Merchandise Inventory: 

Wages in Shop 

Salaries in Shop 

Clerical Departments . . . 



Total. 



Cost of Permanent Fixtures Inventory: 

Machinery Inventory 

Small Tool Inventory 

Warehouse Fixtures Inventory . 
OflBce Furniture Inventory .... 



Total. 



Total Cost of Inventories , 



Annual Report Work: 

Salaries of Chief Clerk's Staff 

Classification Department 
Statistical Department. . . 
Other Departments 



Total Annual Report Work. 



Stationery. 
Light 



Total Cost of Closing Books. . 



Direct 
Expense 



$273.79 

13.41 

21.01 

524.63 

78.35 



$911.19 



$2,612.33 

0.00 

904.00 



5,516.64 



$152.44 

7.35 

707.12 

14.58 

40.33 



$921.82 



$5,349.65 



$100.00 
156.00 
398.00 
407.20 



$1,061.20 



$92.18 
25.00 



$6,528.03 



Super- 
vision 



$25.91 
3.90 
0.00 

166.55 
22.80 



$219.16 



$0.00 
183.00 
275.00 



$458.00 



$25.00 

.80 

75.00 

1.62 

4.48 



$106.90 



$784.06 



$214.50 
0.00 
0.00 
0.00 



$214.50 



$0.00 
0.00 



$998.56 



Total 



$299.70 

17.31 

21.01 

691.18 

101.15 



$1,130.35 



$2,612.33 

183.00 

1,179.31 



5,974.64 



$177.44 

8.15 

782.12 

16.20 

44.81 



$1,028.72 



),133.71 



$314.50 
156.00 
398.00 
407.20 



$1,275.70 



$92.18 
25.00 



$7,526.59 



210 SHOP EXPENSE AJTALTBIg 

times, by means of card indexes, of all machines in the 
factory. Each machine is assigned a nnmber ; and this 
same number is assigned to a card on which all of the 
information pertaining to the machine is listed. This 
information includes the original cost, with any addi- 
tions, the cost of original setting up, and also any data 
pertaining to parts of the machine which may have been 
written off through changes in the structure of the ma- 
chine or otherwise. The small tool inventory as shown 
by this report amounts to $782.12, due to the fact that 
a physical inventory had to be taken because of the 
possibility of tools disappearing in the course of each 
year. This tool inventory, however, refers only to 
what are known as permanent tools, which are assumed 
to last more than one year. All perishable tools are 
written off as soon as purchased by charging them di- 
rectly to manufacturing expense. A report of this kind 
is of value in many instances, and is therefore shown 
at this time. 

The writer has appended hereto a reference list of 
items which are coromonly considered as small tools. 

Report No. 6 shows the annual rental and cost of 
effective floor space for the fiscal year on the property 
owned by the company. This expense, as will be noted, 
is divided between the direct or fixed charges, such as 
depreciation, insurance, taxes, and interest chargeable 
against the property and the maintenance thereof. At 
the foot of this report the total rental is reduced to a 
charge per square foot, which, in this case, is found to 
be $0.59, of which $0.33 is for fiixed charges and $0.26 
is for maintenance. The question of rent was dis- 
cussed more fully in Chapter V. 

Report No. 7 is a statement of insurable values. 
Prom the balances, as carried on the various plant and 



STANDABD BEPOBIS 



211 



Specimen List of Permanent and Perishable Small Tools to be 

used as a reference in classifying charges to the Small Tool 

and Manufacturing Expense Accounts (See note "a" below) 



AiboTS 



B 



Baskets (Platiiic) 

Bellows 

Bends 

Bits, Auger 

Blades 

Blocks, Riveting 

Blow Pipes 

Boxes (for use in case 

hardening f umaoes, 

etc.) 
Braces 
Brushes (when used 

as tools) 
Buffs 
Burners 



Calipers 

Cams 

Carborundum 

Centers 

Chamois Skin 

Chasers 

Chisels 

Chucks 

Chucking Fingers 

Clamps 

Cloth, Emery 

Clippers 

Collars 

Collets 

Coppers, Soldering 

Counterbores 

Counterboxes 

Countersinks 

Cutters 



Diamond Pointed 

Tool 
Dies 

Dogs, Lathe 
Dressers 
Drill Boards 
Drills 

Dusters, Painters 
Die Blocks and Con 



Emery 



Feed Tubes 

Figures 

Files 

Fixtures, assembling, 

staking, etc. 
Flasks 
Flint 

Forming Tool 
Frances 



Gauges 
Glasses, Eye 
Gravers 



Hammers 

Handles 

Heaters 

Holders 

Hoods 

Hooks, Cotton 



Jigs 



E 



Knives 
Knurls 



Ladles 
Letters 



M 

Mallets 

Mandrels 

Micrometers 

Mills 

Moulds 



Needles 
Nippers 



Oil Stones 



Paper, Carborundum 

Paper, Emery 

Paper, Sand 

Pencils 

Plates 

PUers 

Posts 

Pots 



Punches 
Punches and Dies 



R 

Rammers, Sand 

(Foundry) 
Reamers 
Rests, Slide 
Riddles 
Rules 

S 
Saws 

Screwdrivers 
Scissors 
Sieves 
Shovels 
Spindles 
Spools 
Spoons 
Staking Pins and 

Punches 
Stamps 
Stencils 



Taps 

Torches, Blow 
Trowels 
Tubes, Feed 
Tubing, No. 13 Soft 

Rubber 
Tweeters 



Vises 



W 



Watches, Stop 

Wheels 

Wrenches 



(a) Tools having an estimated life of less than one year are called Perishable Tools and 
are charged directly to the Manufacturing Exi>ense Account. 



212 shop expense anai>ysis 

Report No. 6 

JOHN JONES MFG. CO., Inc. 

General and Manufacturing Departments 

Annual Rental and Cost of Effective Floor Space, Fiscal Year 

1916 

Property Owned 
Fixed Charges: Buildings 
Depreciation on Buildings and on Rent Permanent Fix- 
tures $43,235.45 

Insurance on Buildings and on Rent Permanent Fixtures 1,354 . 69 
Taxes on Grounds, Buildings and Rent Permanent Fix- 
tures 13,682.57 

Interest on Investment in Grounds, Buildings and Rent 

Permanent Fixtures (Interest at 5% on Face Value) . 94,86 7 . 00 

Total $153,139.71 

Maintenance: 

Changes to Buildings $4,825.52 

Changes to Rent Permanent Fixtures 381 . 51 

Repairs to Buildings 16,264 . 76 

Repairs to Rent Permanent Fixtures 425 . 79 

Written off Buildings and Rent Permanent Fixtures 114.91 

Unclassified Rent and House Service Expense 1,743.74 

Service Charges (including depreciation, insurance, taxes, 
interest, supplies, and supervision) : 

Steam Distributed 5,154.83 

Illumination 28,859.77^ 

Passenger Elevators 13,245 . 29 

Fire Protection 4,395.82 

House Service Water 13,819.45 

Drinking Water. 3,113.74 

Sweeping and Cleaning 20,919 . 71 

Watchmen and Doorkeepers 10,122 10 

Total $123,386 94 

Total Annual Rent Cost $276,526.65 

Original Cost: 

Cost of Grounds occupied by Buildings and Yards 478,965.92 

Cost of BuUdings 1,383,157. 11 

Cost of Rent Permanent Fixtures 35,216.89 

Cost of Grounds for Driveways, Walks, Courts, etc 

Total $1,897,339.92 

Less Depreciation 514,988.82 

Net Valuation at December 1, 1916 $1,382,351 . 10 

Number of Square Feet Effective Floor Space 469,281 . 00 

Original Cost per Square Foot 4.04 

Net Valuation per Square Foot 2.95 

Fixed Charges per Square Foot .33 

Maintenance per Square Foot .26 

Total Rental per Square Foot .59 



STANDARD REPORTS 



213 



Report No. 7 
JOHN JONES MFG. CO., Inc. 

Statement of Insurable Values, November 30, 1916 





Balance 


Deductions 


Corrected Value 


Buildings 


$1,511,215.22 

691,303.37 

925,192.90 

817,182.90 

37,839.58 

100,341.89 

198,457.37 

28,626.59 

3,646,530.35 


$137,570 08 

217,822.45 

175,948 93 

1,145 25 

1,333 45 

9,895.66 

33,205.26 

14,702 85 

730,130 09 


$1,373,645.14 


Permanent Fixtures 

Machinery 


909,125.82 
749,243.97 


Tools 


816,037 . 65 


Patterns 


36,506.13 


Office Furniture 


90,446 . 23 


Shop Fixtures 


165,252 11 


Warehouse Fixtures 

Merchandise 


13,923.74 
2,916,400.26 






Total 


$7,956,690.17 


$886,109.12 


$7,070,561.05 





merchandise accounts of the company, certain deduc- 
tions have to be made for various causes, such as goods 
in transit, etc., which therefore reduce the amount on 
which insurance is to be carried. 

Report No. 7-A, which is a supplement to this report, 
shows the details of some of the deductions and addi- 
tions. For example: Under the building account it 
will be seen that the ledger balance of $1,511,215.22 
is reduced $137,507.08 for insurance purposes, this 
amount being the cost of excavations and foundations 
included in the total charge against the buildings ac- 
count. In the permanent fixtures account it will be 
seen that certain charges which were improperly classi- 
fied against the machinery account during the year 
are herein transferred to the account to which they be- 
long, that is, the permanent fixtures account. Water 
mains and trenches, which are carried on this account 
at $15,814.75, are deducted for insurance purposes. 
Deductions from the merchandise total are made for 
goods in transit, goods in yards, goods in process of 



214 



SHOP EXPENSE ANALYSIS 



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STANDARD BEPORTS 215 

installation in customers' premises, and for goods to 
be returned. These charges, of course, are typical of 
the factory for which this report was made ; and while 
it would be subject to modification to meet the exist- 
ing conditions in other plants, the general method of 
making these deductions as shown on this report is 
more or less applicable to any condition. It will be 
noted that through an analysis of this kind the in- 
surance on practically $900,000 was saved by the com- 
pany. 

Report No. 8 is an analysis of the insurance expense 
of the company for the fiscal year 1916, as segregated 
between the direct and indirect insurance. It will be 
seen that the direct insurance includes only the pre- 
miums paid insurance companies and the interest on 
returned premiums from mutual companies; whereas 
the indirect insurance includes all charges pertaining 
to the fire protection system maintained by the shop. 
This includes the salaries of night watchmen ; repairs 
and depreciation on fire protection equipment, such as 
sprinklers, etc. ; interest on this equipment as figured 
at five per cent, and all other miscellaneous charges 
incurred by the factory in connection with maintaining 
an internal fire protection system. 

Report No. 9 is more or less self-explanatory. It 
is a summary of the surplus plant being carried by the 
company, divided between grounds, buildings, perma- 
nent fixtures, and machinery. The value of a report 
of this kind is self-evident, as it immediately calls the 
attention of the management to the fact that fixed 
charges are being incurred and assessed against the 
product of the factory because of idle plant and equip- 
ment, and the necessary remedies must therefore be ap- 
plied either to dispose of this excess plant or to utilize 



216 SHOP EXPENSE ANALYSIS 

Report No. 8 

JOHN JONES MFG. CO., Inc. 

General and Manufacturing Departments 

Insurance Expense, Fiscal Year 1916 

Direct Insurance: 

Premiums Paid Insurance Companies a$23,053 . 17 

Interest on Returned Premiums from Mutual Companies 554 . 15 

Total Direct Insurance $23,607.32 

Indirect Insurance: 

Depreciation at 5% on Fire Protection Permanent Fix- 
tures, Face Value $52,770.35 be $2,651 .02 

Changes to Fire Protection Permanent Fixtures 3,518.91 

Repairs to Fire Protection Permanent Fixtures 1,240.29 

Taxes on Fire Protection Permanent Fixtures 357 . 20 

Written Off Fire Protection Permanent Fixtures 

Interest on Fire Protection Permanent Fixtures at 5% . 2,63S.52 
Depreciation at 100% of Increase in Shop Fixtures per- 
taining to Fire Protection 177 . 88 

Other Expenses on Shop Fixtures pertaining to Fire 

Protection 354.97 

Rent c 526.79 

Salaries, Night Watchmen d 3,822.00 

Fire Brigade 

Pump Engineer 

Supervision of Sprinkler System 349 . 69 

Supplies for Fire Brigade 19.27 

Water Charges 17.31 

Watch Box Service (A. D. T.) 

Steam for Fire Pump, etc 258.31 

Telephone Service 

Other Charges 2,287.98 

Total Indirect Insurance $18,220.14 

Grand Total Insurance Expense $41,827 . 46 

Average Amount of Insurance Carried During the Year . . . $4,806,468 . 00 
Rate per $100 per Annum .87 

a For mutual insurance, Companies include only net premiums paid, 
i.e., gross premiums less returned premiums. Report only premiums cov- 
ering insurance for fiscal year 1916. 

b Includes suction well, fire pumps, and gravity tanks, headers, piping 
and fittings, undergroimd pipe Mnes and fittings, imderground drams for 
sprinklers and other fire protection apparatus; hydrants and their special 
pipe Unes and fittings, hose houses and post indicators; sprinkler piping, 
heads and other fittings; stand pipe risers, metal hose racks and connec- 
tions (except hose); watch boxes and clocks. 

c Rent for space occupied by fire pumps, fire brigade, hose carts, valve 
room, etc. 

d At manufacturing plants, ^ of total salaries; at distributing houses, 
J^ of total salaries. 

e Includes $12.50, depreciation of plant items sold or junked ^during 
year. 



BTANDAED REPOETS 



217 








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218 SHOP EXPENSE ANALYSIS 

it for manufacturing purposes. The latter can only 
be acoomplislied, of course, through the procuring of 
more business. In the opinion of the writer, this re- 
port, while of a very simple nature, is of immense value 
and should be compiled for the use of the management 
wherever possible. 

Eeport No. 10 is a comparative statement of the 
Manufacturing Expense for the fiscal years 1915 and 
1916, as divided between the main shop of the company 
and its annex ''A." Reports of this kind should al- 
ways be made up in comparative form wherever pos- 
sible, as one year's figures in themselves do not serve 
the purpose for which a report of this kind is intended, 
that is, executive control. When arranged in compara- 
tive form, as in this report, excessive increases in any 
of the items of expense immediately become apparent ; 
and while in most cases they can in all probability be 
easily explained and justified, at least they serve the 
purpose of causing an investigation, and where ex- 
cesses are found to have been unwarranted, the neces- 
sary control can be exercised to reduce them. 

Eeport No. 11 is known as a Piece Work Percentage 
Report, in that it is intended to show the percentage 
of piece work being done in each department of the fac- 
tory. This percentage is determined on the basis of the 
total productive hours turned in on time tickets by the 
various departments. The total hours are first divided 
between expense hours and productive hours. The 
productive hours are then further subdivided between 
standard and premium piece-work hours, gang piece- 
work hours, and straight day-work. On this report the 
day-work hours are omitted. On examination of this 
report it will be seen that in only two departments of 
the factory is all work done on a piece-work basis. In 



Repokt No. 10 

JOHN JONES MFG. CO., Inc. 

Statement of Expense of Manufacturing Department for Fiscal Years 191.5 and 1916 



Salaries, Administration 

Clerical Department 

Production Department . 

Inspection Branch 

Manufacturing Branch . . 
Service and Maintenance Branch . 
Belting 



Defective Work or Errors. 



I Buildings 

Permanent Fixtures . 

Machinery 

Small Tools 

Patterns 

Shop Fixtures 



Fuel for Power Plant 

Fuel, Other (except Gas) 

Gas Purchased 

Injuries (Inc. Legal and Med. Service) . 



Mo 



Power Purchased 

Rent of Real Estate 

Repairs to Buildings 

Permanent Fixtures . 

Machinery 

Small Tools 

Patterns 

Shop Fixtures 

Shop Worn Stock . . . 

Shop Expense Materials 

Shop Expense Supplies 

Stationery Used 

Taxes 

Telephone Rentals and Calls . . . 



Travehng Expenses 

Water 

Written Off Buildings 

Permanent Fixtures. . 

Machinery 

Small Tools 

Patterns 

Shop Fixtures 

Unclassified 

Charges from other Departments . 
Charges to Other Accounts 



Total, 1915 



7,084.: 
21,236.; 
24,985.' 
35,610. 
73,722.1 
70,736.1 



15,815.1 
55,677.: 
18,679.' 
23,930.1 
3,963. 



1,044.1 
5,111 4 
138,407.' 
1,984.1 
2,831.! 
49,975.1 
51,123.1 
136,1W ; 



Total. 1916 



$10,059.08 
65,488.36 
82,950.67 
25,932.68 

128,004.26 
82,307.24 



37,679.26 

64,172.75 

69,405 88 

926 52 

11,325 07 

6,119.. 50 

32.20 

31,668.53 

977.00 

2,622.30 

2,308.11 

12,367.66 

2,733.79 

357.63 

14.00 

253.08 

1,012.50 

16,288.53 

21,418.72 

29,946.83 

30,605.24 

1,176.07 

6,539.55 

1.32 

8,918.73 

44,238.97 

8,135.73 

27,654.84 

2,496.83 

90.14 

443.68 

13,230 45 

67.21 

532,70 

6,029.04 

118,422.40 

1,309.79 

13,905.82 

17,977.77 

30,553 61 

70,399 8S 



Main Shop 



Annex "A" Shop Annex "B" Sho] 



$9,671.66 
63,079.50 
81,950.43 
25,932.68 
114,375.08 
77,410.85 



15,380.53 

5,772.79 

30,489.58 

26,109.35 

43,158.00 

72,269 26 

915 51 

12,550 33 

6,119..W 

32.20 

27,554.27 

588.42 

2,207.30 

2,165.60 

10,455.67 

2,633.49 

357.63 

14.00 

253,08 

711.08 

12,513.30 

18,998.94 

24,408.69 

30,380.68 

1.176.07 

5,290.47 

1.32 

8,888.81 

43,640.03 

8,028.72 

19,660.87 

2,481.16 

89.57 

430.84 

13,020 65 

58.79 

.540,77 



13,9.53.10 
17,'249.13 
25,592.77 
66,562.35 



Total $1,630,837.24 $860,996 01 $758,100.05 



$387.42 
2,406.88 
1,000.24 



2,055.21 
478.33 
3,396.30 
2,749.75 
6,096.22 
2,863.38 
11.01 
1,054.21 



4,114.26 
388.58 
415.00 
142.51 
902.80 
100.30 



2,258.23 

5,538.14 

244.56 



107.01 

2,295.08 

35.67 

.57 

13 04 
209.80 

1.23 

14 52 
342 16 

3,588 IS 

11 01 

101.26 

566.56 

4,960-84 

3,837.50 



9,182.60 
8,820.16 
14,918.53 



214.34 

2,881.40 

161.55 



STANDARD REPORTS 



219 



Report No. 11 

JOHN JONES MFG. CO., Inc. 

Piece Work Percentage Report 





Total 
Hours 


Expense 
Hours 


Prod. 
Hours 


Piece Work 




Number 


Stand. 

and 

Premium 

Hours 


Gang 
Hours 


Total 
Hours 


%of 
Prod. 
Hours 


101 


16,926 

11,944 

16,357 

20,855 

36,725 

2,572 

6,748 

2,751 

24,817 

35,930 

47,955 

7,244 

1.453 

38,046 

5,861 

15,685 

18,575 

19,585 

13,141 

927 

11,908 

13,550 

57,408 

16,721 

16,881 

11,728 

750 

6,244 

9,465 

11,243 

61,142 


4.799 
1,083 
3,449 
3,552 
3,027 
353 

" 1,073 

4,400 

5,444 

7,309 

955 

183 

1,087 

778 

874 

3,869 

6,065 

1,251 

157 

828 

1,064 

3.313 

4,905 

966 

1,433 

' i',646 

779 

1.158 

5.984 


12.127 

10.861 

12,908 

17,303 

33,698 

2,219 

6,748 

1,678 

20,417 

30,486 

40,646 

6,289 

1,270 

36,959 

5,083 

14,811 

14,706 

13,520 

11,890 

770 

11,080 

12,486 

54,095 

11,816 

15,915 

10,295 

750 

5,204 

8,686 

10,085 

55,158 


12,127 

6,064 

535 

14,497 

20,366 

442 

5,750 

14,816 

22,266 

30,452 

1.277 

219 

■ 2.5S3 

2 

10,405 

10,780 

7,971 

613 

600 

394 

6,627 

1,511 

15,915 

8,945 

668 

1.347 

4,416 

3,975 

45,921 


' 2.544 
3.619 

i0,246 
781 

' 1,440 

'""26 
2.740 



36,019 

210 

13.071 

■■■"ie 

9,595 

1,696 

44,701 

178 

" 3,i8i 
2,536 


12,127 

8,608 

4,154 

14,497 

30,606 

1,223 

5,750 

1,440 

14,810 

22,266 

30,478 

4,017 

219 

36,019 

2,793 

13,073 

10,405 

10,780 

7,971 

529 

10,195 

2,090 

51,328 

1,689 

15,915 

8,945 

668 

1,347 

7,597 

6,511 

45,921 


100 


102 


79 2 


103 


32 2 


104 


83 7 


105 


90 8 


106 


55 1 


107 


85 2 


108 


85.8 


109 


72 5 


110 


73.3 


Ill 


74.9 


112 


63 9 


113 


17.3 


114 


97 4 


115 


55.0 


116 


88.4 


117 


70.8 


118 


79.8 


119 


67.1 


120 


68.8 


121 


92.1 


122 


16.8 


123 


94.9 


124 


14.2 


125 


100.0 


126 


87.0 


127 


89.2 


128 


25.8 


129 


87.3 


130 


65.1 


131 


83.2 






Total 


561,137 


71,178 


489,959 


251,378 


132,593 


383,971 


78.9 






Special Depabtments 


2,126 

1,010 

7,144 

18,225 

7,873 

123,517 

13,811 

610 

2.876 

38,754 

33,782 

28,691 


238 

567 

3.480 

10,710 

529 

29,642 

747 

242 

2,079 

36,395 

32,305 

1.271 


■ 

1.888 

443 

3,664 

7,515 

7,344 

93,875 

13,064 

368' 

797 

2,359 

1,477 

27.420 


115 

'■"226 

982 

1,082 

■■■■29 

333 

1.439 


6,193 


115 

358 
6,175 
1,082 

29 

333 

1.439 


6.1 


Brass Foundry 










4.8 


Insivntion 


6.5 




8.3 










Tool 


1.2 




22.7 


8i>ecial Work 


5.3 






Grand Total 


839,556 


189,383 


650,173 


257.138 


137.918 


395,056 


60.6 



220 



SHOP EXPENSE ANALYSIS 



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STANDAED KEPORTS 221 

such factories where it is the intention of the manage- 
ment eventually to maintain the maximum amount of 
piece work possible, a report of this kind will show 
what progress is being made from month to month by 
the various departments. Additional columns can be 
arranged alongside of the percentage column shown on 
the report in which the best previous records made by 
the respective departments can be carried. In this 
way the attention of the management can be focused 
on such departments as show a tendency to fall off in 
the amount of piece work being done by them. 

Report No. 12 shows the expense against depart- 
ments of the factory which, for some special reasons 
of the management, are kept separate from the rest of 
the plant. They are known as special departments. 
This condition is very often found necessary in plants 
where the manufacturing expense incurred by depart- 
ments, similar to those shown on this report, has to 
be distributed on some other basis than the machine 
unit system or its equivalent. In this report we find 
seven special departments, as indicated by the brass 
foundry, painting, dipping, experimental, japanning, 
lacquering, and plating departments respectively. The 
expenses charged against these respective departments 
are shown according to different kinds of expense, but 
the totals are distributed on several different bases. 
For example, in the brass foundry the expense is dis- 
tributed on a ''pound of casting" basis; while in the 
painting, dipping, and experimental departments the 
expense is distributed on a "labor cost" basis; and 
finally, in the japanning, lacquering, and plating de- 
partments, it is distributed on a "man-hour" basis. 
This naturally requires the determination of the num- 
ber of units used in each case, which are here indicated 



222 



SHOP EXPENSE ANALYSIS 



Report No. 13 
JOHN JONES MFG. CO., Inc. 

Comparative Statement of Floor Space in Square Feet 



Shop Expense Floor Space 


Rating 


Average 

Quarter 

1915 


First 

Quarter 

1916 


In- 
crease 


De- 
crease 


Power: 


Regular 
Regular 
Regular 
Regular 
Regular 


10,477 

5,806 

761 

309 

300 


13,140 

6,654 

687 

86 

300 


2.663 
848 




Electric Current Generating System.. . 
Electric Current Distributing System. . 


••■■74 
223 










Total Power Plant Space 




17,653 


20,867 


3,214 




Rent: 

One-quarter Main Shop Aisles, Passen- 
ger Elevators, Stairways, Toilet 


Regular 
Office 


46.061 
13,713 


50,201 
18,479 


4,140 
4,766 












Total Rent (Space common to all) 




59,774 


68,680 


8.906 






Office 
Office 

Regular 
Regular 
Regular 
Regular 


353 
1,603 

3,196 

957 

561 

53 


353 
1,603 

4,237 

1,028 

225 

170 


1,041 
71 

■■■ii7 








Tools: 

Care of Small Tools 








Care of Numbered Machinery 

General 


336 






Total Tools Space 




4.767 


5,660 


893 










Administration: 

General Shop Offices 


Office 
Regular 


5.055 
18.009 


4,978 
25,138 


' 7.i29 


77 


Department Offices, Lockers, Aisles, etc 




Total Administration Space 




23,064 


30,116 


7.052 




Drafting: 


Regular 

Office 

Regular 


1,657 

9,274 

122 


1.596 

10,695 

114 


' V,42i 


61 








8 






Total Drafting Space 




11,053 


12,405 


1,352 










Special Departments: 


Regular 
Regular 
Regular 
(Regular 
(Office 
Regular 
Regular 
Regular 
iRegular 


5,053 

1,643 

1,318 

1.145 

3 

3,500 

483 

2,950 

83 


3.594 
1,500 
1.100 

975 

000 
3.358 

449 
2,595 

000 




1,459 




143 




218 




170 




3 

142 




34 




355 


Zinc Fo'indT 


83 






Total Special Departments Space . 




16,178 


13,571 




2,607 


Raw Material: 

Stock Space, Freight Elevators (part) 
etc 


Regular 
Office 


27,287 
515 


29,695 
379 


2,408 




Offices 


136 






Total Raw Material Space 




27,802 


30.074 


2,272 





STANDARD REPORTS 

Report No. 13 — Continued 



223 



Shop Erpense Floor Space 


Rating 


Average 

Quarter 

1915 


First 

Quarter 

1916 


In- 
crease 


De- 
crease 


Process Material: 

Stock Space, Freight Elevators (part) 


Regular 
Office 


59,358 
1,349 


73,645 
1.712 


14.287 
363 




Offices 








Total Process Material 




60,707 


75.357 


14,650 




Machine Expense 


Regular 
Office 


159,666 
76 


151,422 
000 




8,244 




76 


Total Machine Expense 




159,742 


151,422 




8,320 




Regular 

Office 


350,755 
31,941 


371,909 
38.199 


21,154 
6,258 




Total Area occupied by Shop 








Grand Total Area occupied by 
Shop 




382,696 


410,108 


27.412 











on the line marked ** Units." After this expense has 
been reduced to a unit basis, costs of work done in any 
of these departments can then be very readily deter- 
mined. 

Report No. 13 is a comparative statement of the 
floor space chargeable against the several main di- 
visions of manufacturing expense. Floor space is di- 
vided between office and regular space, for the reason 
(as explained in Chapter V) that the office space is 
charged a somewhat higher rate because of the extra 
maintenance expense incurred. This report is also 
made up in comparative form, which immediately 
brings to the attention of the management any unwar- 
ranted use of floor space. 

Eeport No. 14 is an analysis of the number of em- 
ployees in both the manufacturing and general de- 
partments of the company. It is made up in compara- 
tive form for the fiscal years 1915 and 1916, and shows 
the payroll for the last week in each year and the 
average weekly wage paid to employees in both the 



224 



SHOP EXPENSE ANALYSIS 



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STANDAKD EEPOETS 



225 



Report No. 15 

JOHN JONES MFG. CO., Inc. 

Shop Statistics for Fiscal Year 1916 



Per Cent 

of Prod. 

Labor 



Average Number of Employees: 

Expense 

Productive (A) 



551 
1,155 



Total . 



Productive Labor . . 
Raw Material Used . 
Shop Expense 



1,706 

792,552 
803,002 
758,100 



Total , 



Cost per Productive Employee of Labor, Material 

and Expense (C) 

Shop Expense: 

Salaries (B) 

Changes and Repairs 

Defective Work 

Supphes 

Depreciation on Buildings, Permanent Fixtures 
and Machinery 

Other Depreciation 

Insurance 

Written off Plant. .......................... 

Miscellaneous 

Charges between Manufacturing Departments 

(Hawthorne Only) 

Charges to Other Accounts 



2,353,654 



2,038 

372,420 

108,130 

5,773 

90,908 

99,757 
85,735 

10,456 

32,672 

132,171 

58,100 



66,563 



Total . 



Standard Loading on Labor and Material 

Deficit in Loading 

Per Cent Deficit to Standard Loading 

To Sum of Labor, Material and Standard 
Loading 



758,100 
540,813 



217,287 
40 

10 



48 



101 

96 



47 

14 

1 

12 

13 
12 

1 

4 

17 

7 



96 



28 



226 



SHOP EXPENSE ANALYSIS 






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STANDAKD REPORTS 



227 



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228 SHOP EXPENSE ANALYSIS 

manufacturing and general departments of the com- 
pany. A report of this kind will serve as a basis for 
any provision the management may make toward a 
general increase or decrease in the wage scale of their 
employees, either because of extraordinary profits or 
otherwise. 

Eeport No. 15 shows in a very condensed way the 
shop statistics for the current year. It analyzes the 
average number of employees by expense and produc- 
tive employees, and then shows the three elements en- 
tering into the cost of manufacturing — productive la- 
bor, raw material, and shop expense. The total of 
these three elements of cost is then reduced to a ''cost 
per productive employee. ' ' The shop expense for the 
year is also analyzed according to its main divisions, 
the difference between the actual expense applied on 
production orders and that incurred during the year 
being shown as a deficit or surplus as the case may be. 
In this case the deficit amounted to 40 per cent of the 
actual manufacturing expense incurred. 

Reports Nos. 16 and 17 are typical brass foundry 
reports and are practically self-explanatory. Report 
No. 16 shows the total input of metals to the foundry 
by months; while Report No. 17 shows the output of 
the foundry by mixtures. On this latter report special 
attention is called to the amount of shrinkage which 
will be seen by comparing the weight of the input, as 
shown on the report, with the output of finished cast- 
ings. After making due allowance for inventories of 
metals on hand at the beginning and end of the year, 
the percentage of shrinkage in this case was found to 
be 3.5 per cent of the input, or equivalent to a shrink- 
age of 115,091 pounds. This factor of shrinkage is a 
very important and serious one in a large percentage 



STANDARD BEPOETS 229 

of brass foundries, and a report of this Mnd ■will serve 
to assist the management in taking the necessary steps 
to guard against unwarranted excesses over normal 
shrinkages. 

The different specimens of reports which the author 
has used in this chapter should not be considered as 
standard in any way. They have been used simply 
to bring to the attention of the reader some of the dif- 
ferent methods pursued in collecting manufacturing 
statistics, so that they will serve whatever purposes 
the management may have in mind. There are, of 
course, many other reports used in manufacturing 
work which could be described. Those included in this 
chapter, however, should be sufficient to bring to the 
attention of the reader the importance of following 
some systematic method in assembling the data, and 
also to show the value which these reports have from 
an executive viewpoint. 

In conclusion the author wishes to call attention 
agaiu to the importance of giving the distribution of 
manufacturing expense serious consideration, for it 
will be evident, no doubt, to any student of this subject 
that it is by far the most important factor in manu- 
facturing. Sincere appreciation of its importance by 
those in charge of manufacturing plants will do much 
towards promoting industrial economy and welfare. 



INDEX 



Accounts, classification of manu- 
facturing, 30 
Administration expense, 
analysis of, 47 
by machine unit system, 101 
charges for, 16 
composition of, 46 
Agriculture, population engaged 

in, 135 
Analysis of normal manufactur- 
ing expense, 99 
Appropriations, symmetry of, 

145 
Automatic machinery, effect on 

costs, 127 
Automobile, waste in parts manu- 
facture, 155 
Averages, errors in, 4 

Balance sheet, standard, 208 
Beall, F. F., on time study, 168 
Brass foundry, 
reports, 226, 227 
waste, 159 
Budget, financial, 145 
Buildings account, 36 

permanent fixtures pertaining 
to, 38 
Bulk as basis for material ex- 
pense distribution, 23 
Burden during business depres- 
sion, 125 

Candied citron, waste in, 162 
Carnegie, Andrew, 137 
Centers of production, 45 



Church, A. Hamilton, justifies 
the supplementary rate, 127 

Classification, 

by reference lists, 35 
of expense items, 15 
of manufacturing accounts, 30 
of productive machines, 97 
of raw material expense, 91 
of tool expense, 89 
of worked material expense, 91 
reference list of rent expense, 
67 

Cocoanut, shredded, waste in, 
162 

Compressed air expense, 62 

Constant expense, 121 

Costs, graphic determination of, 
171 

Current variation, 116, 117 
chart, 118, 192 

Day-work and piece-work labor 
payroll compared to total 
wages, 180 
Deliveries report, 203 
Department, special, expense, 220 
Departmental expense, based on 

productive labor, 4 
Departmental administration ex- 
pense, 47 
by machine unit system, 101 
Depreciation, 

determination of, 78 
of plant, 66 
repair reserve, 82 
report, 86 



231 



232 



INDEX 



Depreciation, Continued 
reserve, 78, 81, 199, 202 
schemes, factors governing, 80 

Depreciation rates, 
English practice, 83 
on buildings and permanent 

fixtures, 84 
on machinery, 84 

Depressions, cost accounting for, 
125 

Direct charges, 45 

Distribution of steam expense, 59 

EPTEcnvB floor space, 65 

Efficiency waste, 164 

Electric current, 

distributing expense, 61 
generating expense, 60 

Electric illuminating expense, 63 

Employee and average wage re- 
port, 224 

Expense items, classification of, 
15 

Factobt plant accounts, 31 

sub-classification, 36 
Fatigue, 168 
Financial budget, 145 
Fixed charges, 

by machine unit system, 111 

three divisions of, 77 
Floor space, 65 

chargeable to each division of 
manufacturing expense, 74 

comparative statement of, 222 

monthly analysis of, 196 

report, 212 

typical summary of, 70 
Foundry reports, 226, 227 
Foundry waste, brass, 159 
Functional organization, 132 

chart, 144, 148 

Gas generating expense, classifi- 
cation of, 72 



General administration expense, 
47 
by machine unit system, 101 
Graphic analysis, 

of departmental overhead ex- 
pense, 189 
of effective floor space, 196 
of manufacturing expense, 184, 

188 
of non-productive labor, 173 
of productive payroll, 180 
of shop payroll, 172 
of total merchandise per em- 
ployee, 181 
Graphic comparison, 

of merchandise mantifactured 

to total output, 177 
of weight of output by classes 
of merchandise, 176 
Graphic determination of costs, 

171 
Groimds, 

classification of expenses, 73 
distribution of maintenance 
of, 73 

BLamilton, Alexander, * * Report 
of Manufacturers," 135 

Idle labor expense, 18 

by machine unit system, 113 
Illuminating expense, 63 / 

classification of, 72 
Industry, history of grovrth, 134 
Interest on factory equipment, 

87 
Inspection, 

of material, 90 

branch of organization, 141 
Insurable values, statement of, 

213 
Insurance and tax charges, 85 
Insurance expense report, 216 
Inventory and report cost, 209 



INDBX 



233 



Inventory cost of permanent and 
perishable small tools, 211 

Jewelry manufacture, waste in, 
162 

Laboe, 

graph of productive and non- 
productive, 172 
non-productive, 17 
non-productive, analysis of by 
non-productive and produc- 
tive expense labor, 173 
Ledger, primary object of, 29 
liife of a property, 81 
Line or military organization, 

132 
Liquidation value of plant, 81 

Machine classification, 91 
Machine expense, 
definition of, 22 
distribution of, 15 
unit analysis of normal, 102 
Machine unit expense, summary 

of productive, 115 
Machine unit system, 94, 117 
Machinery account, 41 
Management, factory, divisions 

of, 132 
Manufactories, three organiza- 
tions of, 14 
Manufacturers, report on by 

Alexander Hamilton, 135 
Manufacturing accounts, classi- 
fication of, 30 
Manufacturing expense, 
analysis of normal, 100 
as function of time, 9 
as percentage of productive la- 
bor, 3 
common distribution of, 2 
comparative statement, 218 
defined, 14 



Manuf acturingexpenae, Contintted 

graphic analysis of, 184, 188 

summary of, 46 
Material, 

inspection, 90 

permanent fixtures pwtaining 
to, 41 

waste, divisions of, 154 
Material expense, 

definition of, 21 

distributed by classes of mer- 
chandise, 26 

distribution of, 15, 23 
Merchandise, 

accounts, 32 

comparison of total worth to 
product per employee, 181 

manufactured compared to 
total shop output, 177 
Midvale Steel Company, 166 
Military organization, 

branches of, 139 

chart of, 138 

definition of, 132 
Motion studies to minimize 

waste, 166 

NoN-PRODUCTlVE, 

bench, definition of, 98 
machine, definition of, 98 
Non-productive labor, 17 
analysis of by non-productive 
expense labor and productive 
labor, 173 
Normal machine expense, 95 

unit analysis of, 102 
Normal manufacturing expense, 
100 

Oeoanization, 
chart of functional, 144, 148 
chart of military type, 138 
evolution of, 137 
of a manufactory, 132 
of a railway, 150 



234 



INDBX 



Output, comparison of weight of 
by classes of merchandise, 
176 
Overhead expense, 
compared to allowable expense, 

193 
compared to productive labor, 
189 

Packard Motor Car Company, 

167 
Paint making, waste in, 161 
Paper-box making, experiences 

from time study, 168 
Patterns account, 43 
Payroll, monthly chart of produc- 
tive and non-productive la- 
bor, 172 
Permanent fixtures account, 37 
Percentages, 

averaged when composed of 

differing units, 4 
standard vs. variable, 6 
Piece-work, 

a function of quantity, 9 
and day-work labor payroll, 

180 
error of as basis for expense 

distribution, 10 
percentage report, 219 
Plant accounts and depreciation 

reserve, 199, 202 
Power consumption, fluctuations 

in, 54 
Power expense, 

by machine unit system, 105 
composition of, 49 
control of, 52 
distribution of, 17 
summary, 50 
typical analysis of, 57 
Power plant, permanent fixtures 

pertaining to, 38 
Power test report, 108 



Process point and process period, 

151 
Production, 

branch of organization, 142 

centers, 45 

eflSeiency, current variation as 
a measure of, 129 
Productive, 

and non-productive labor, 
monthly chart of, 172 

bench, definition of, 98 

employees, graphic analysis of, 
180 

labor as basis for manufac- 
turing expense, 2 

labor compared to depart- 
mental overhead, 189 

machine, definition of, 98 

machine, unit expense, sum- 
mary of, 115 

machines, classifications and 
sub-divisions of, 96 

wages, graphic analysis of, 180 

Eailway organization chart, 

150 
Rates, standard va. variable, 6 
Raw material, 

account, 32 

as basis of material expense, 
23 

expense, classification reference 
list, 91 
Reference list, classification by, 

35 
Rental report, 212 
Rent expense, 

by machine unit system, 110 

classification reference list, 67 

distribution of, 17 

the two divisions of, 64 

transfers to, 68 

typical analysis of, 69 

unit of, 64 



INDEX 



235 



Beport, 

of annual rental and eost of 
effective floor space, 212 

of annual manufacturing ex- 
pense, 218 

of employees and average 
wages, 224 

of insurance expense, 216 

of plant account and deprecia- 
tion reserve, 200, 202 

of shop output and deliveries, 
203, 206 

of special department expense, 
220 

Saiaeies chargeable to power ex- 
pense, 51 

Scientific management, 135 

Service charges, 45 

Shop, 

expense, determination of, 129 
fixtures account, 43 
output report, 203, 206 
payroll, monthly chart of, 172 
statistics per year, 225 

Shop cost, 124 
composition of, 1 
construction of, 22 

Shrinkage, 

in brass founding, 159 
in paint factory, 161 
in worsted making, 163 

Silver solder, waste of, 155 

Small tools account, 43 

Staff organization, 132 

Standard reports, 198 

Standardization of machine types, 
95 

Statement of inventory cost, 209 

Statistical reports, 198 

Statistics, 

annual, for shop, 225 
graphic presentation of, 171 

Stealing, losses incurred by, 164 



Steam, 

distributing expense, 57 
expense, distribution of, 49 
generating expense closed out 
to material and machine ac- 
counts, 56 
generating expense, typical 
analysis of, 58 
Store room control, 157 
Summary of manufacturing ex- 
pense, 46 
of productive machine unit ex- 
pense, 115 
Supplementary rate, 116, 122 
Symbols for classification, 16 
Symmetry of appropriations, 145 

Tabor Manufacturing Company, 

166 
Tax and insurance charges, 85 
Taylor, Frederick W., system of 
functional management, 133 
motion studies by, 166 
scheme of functional organiza- 
tion, 148 
Time, 

keeping on piece-work jobs, 12 
manufacturing expense as a 

function of, 9 
studies, 168 

waste, divisions of, 164 
wasted through faulty plan- 
ning, 19 
Tool, 

account, 43 

expense by machine unit sys- 
tem, 111 
expense, classification reference 

list, 89 
expense, defiaiition of, 89 
expense, distribution sheet, 112 
inventory, 211 
Transfers, 
from rent expense, 70 



236 iNi^x 

Transfer, Continued 

of service charges, 45 

to power systems, 55 

to rent expense, 68 
Transmission expense, 62 



Unclassified expense by ma- 
chine unit system, 114 
Unit, 
analysis of normal machine ex- 
pense, 102 
of rent expense, 64 
of time as basis for expense 
distribution, 12 

Wage, 
payment, 165 



Wage, Continued 

per employee report, 224 
Waste, 

factor in maunf acturing, 158 

in efficiency, 164 

miscellaneous, 169 

of material, 154 

through low wages, 165 
Wasted time, 164 
Water, permanent fixtures per- 
taining to, 40 
Whitney, W, E., "Modem Sci- 
entific Methods," 167 
Work in process accounts, 32 
Worked material expense, classi- 
fication reference list, 91 
Worsted mills, waste in, 163 



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UC SOUTHERN REGIONS 



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